FINREP: Financial reporting to UK and EU banking regulators is changing

Financial reporting, or FINREP, is a European regulation which applies to 'credit institutions' (e.g. banking organisations) that will significantly increase the level of reporting of financial information to the regulator.

The regulation has been developed by the European Banking Authority and is to be implemented by local country regulators. Compliance with FINREP is currently set for 1 January 2013.

In the below video, Gilly Lord and Rob Konowalchuk provide an introduction to FINREP (Financial Reporting) and COREP (Common Reporting), the implications of the implementation and what we can do to help.

 

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Rob: Hello, I’m Rob Konowalchuk from PwC’s financial services regulatory practice and I’m here today with Gilly Lord, who is a partner on our team, who focuses on prudential regulation. So many right now, are clearly focussed on the increasingly demanding capital requirements imposed upon banks and other financial institutions by Basel III and in Europe CRD4. So we’re here now just to focus on COREP and FINREP which will be the new requirements imposed by the EBA as a result of CRD4 to banks and building societies and investment firms, which effectively harmonises prudential regulatory reporting across Europe and impacts most firms in the UK. Gilly, perhaps you could provide us with some more background on these new requirements?

Gilly: Yes of course. So I think the first piece of background is a changing expectation that the regulator has, about the importance of regulatory reporting. So we’re seeing new rules which we’ll talk about in a moment, but I’m also seeing the regulator putting much more scrutiny on firms regulatory reporting, asking tough questions and expecting a really high quality. So we’ve got a changed context. These new rules themselves, as you’ve already mentioned, come from CRD4 and CRD4 mandate the EBA to introduce a harmonised regulatory reporting regime across Europe. The EBA’s response is COREP and FINREP. COREP is the introduction of a new capital reporting regime, together with the supporting risk elements and FINREP introduces a new financial reporting regime. So a requirement for firms to report to the regulator on their P&L and on their balance sheet, with lots of supporting analyses as well.

Rob: So in terms of FINREP then, there’s been some mixed messages around the applicability of FINREP in the UK from next year. Will it definitely apply in the UK next year?

Gilly: Unfortunately the answer is we don’t actually know. So the proposed rules, certainly would apply FINREP to any firm of the type that I’ve just described. ECOFIN, when they considered these rules as part of the European process, did propose some changes. The first was that FINREP would only apply to firms who currently report under IFRS and the second was that national regulators would be given the discretion as to whether they wanted to implement FINREP. On that second point, if that change stays in, we don’t expect the FSA to mandate FINREP adoption next year.

Rob: OK, now in terms of the scope of application, I understand that this differs from COREP and FINREP and indeed also, depending on the type of regulated firm.

Gilly: That’s exactly right. So starting with COREP, it’s a very wide application, so for firms’ in the UK, if you are currently a bipuri regulated firm of any size, COREP will apply to you and COREP requires both solo reporting entity by entity, but also consolidated reporting. So it’s a very wide scope of application. FINREP is much narrower. So FINREP only catches you, first of all at a consolidated group level and only if that consolidated group contains a credit institution. So FINREP will impact far fewer firms.

Rob: OK and in terms of the timescales, they’re potentially quite demanding on firms, but I understand there’s some uncertainty around that as well?

Gilly: Yes, there’s a lot of uncertainty. The biggest uncertainty of course surrounds CRD4. So in theory CRD4 gets implemented and goes live on 1st January next year. However, the political process to get CRD4 agreed at the European level is very difficult, it’s going very slowly and there’s a big question mark as to whether the politicians will get there in time. If the 1st January implementation does go ahead then COREP and FINREP will begin. The first required reporting will be at the end of the first quarter of 2013. So it will be reporting for the period ended 31 March 2013 with reporting required 30 business days thereafter.

Rob: OK, thanks. So timescales aside, the actual requirements pose quite a significant challenge to firms. From our discussions that we’ve had with clients and indeed with the regulators themselves, data seems to be the overarching concern in terms of sourcing the right data and assuring its quality etc. Already a concern with existing reg reporting and probably made a bigger challenge with COREP. Do you agree?

Gilly: I do agree. I think you’re right to start there, because I think data is the single biggest challenge that these new rules will introduce. Why is that? First of all if you just look at the returns, the new proposed returns are much, much bigger than anything the FSA demands at the moment. So the sheer number of reporting fields goes up almost exponentially. So a lot more data to be collected. That data is a lot more granular, it requires firms to set out their workings that given rise to their end capital position and also it requires firms to cut the returns into new dimensions. So split the new returns for credit risk for example, by counterparty by geographical area, just a few examples of the new dimensions of data that firms need to be able to report.

Rob: So quite a big impact and given this impact, if firms are now in the process of thinking through how to implement this and probably have some projects underway, what do you think are the things they should be focussing on now in this lead-up period?

Gilly: Well data certainly and I think the first step to deal with this big challenge is a really good robust GAAP analysis. What data is required by the new reporting requirements, where does it exist in my organisation and how can I source that in a well controlled and sustainable way? So data is the first point. We haven’t touched on the technology challenges which were introduced by the new requirements. So, first of all you need a good robust system to get all of this data into the new reporting formats. The other new thing that comes in with COREP and FINREP is mandatory XPRL reporting. Another technology challenge and something that is very new in the regulatory reporting world.

Rob: OK. In addition to that, it seems the regulators these days are increasingly focussed on sound governance. Clearly an important aspect for all public reporting and of reporting to the regulators. Is this something that might need to be thought through in terms of how it might need to be enhanced as a result of COREP?

Gilly: Certainly and you’re right. The regulator has been looking very closely at firms’ governance over the last few years and in particular recently they’ve been focussing on governance around regulatory reporting processes. So with these new requirements it will be important to identify who at the very top of the firm is actually responsible for reg reporting, how have they delegated that responsibility to others? But how do they get sufficient assurance to know that when they approve a return ready to be issued to the FSA, it really is complete, accurate and going to be submitted without any risk.

Rob: Thanks Gilly. Well that concludes our discussion on COREP and FINREP. If there are any questions please feel free to reach out to either of us. Thank you.

There are three key areas which all ‘credit institutions’ need to consider:

  1. Interpreting FINREP policy and requirements
    This is a complex area as the EBA's ITS requires a level of technical expertise and interpretation as well some information over and above GAAP requirements (such as certain economic hedges).
  2. Understanding FINREP data requirements
    FINREP requires granular data relating to the income statement and balance sheet and in our experience will require data sourced from the General Ledger and various other finance data and trade source systems (e.g. assets by classification & geographic region of counterparty).
  3. Developing a robust reporting and governance process
    FINREP requires over 40 templates with around 3,500 data fields to be completed and submitted on a quarterly basis.Current reporting in the UK only requires FSA 001 and 002 to be submitted annually.

The consultation period has recently ended and the final draft of FINREP regulation is expected in the second half of 2012. We are consulting with the FSA and various other companies on this topic, to fully understand what the implications of FINREP will be.

Download our flyer, Regulatory reporting of financial information, for more details on the regulation and the impacts for you.