RBS Fine Highlights Critical Role of Reference Data in Compliance
Last week the UK’s Financial Conduct Authority (FCA) fined RBS £5.6MM for “pervasive reporting failures” or, in other words, for having inaccurate reference data.
The FCA Handbook Online states:
“For agency transactions a customer/client identifier is required to identify the client on whose behalf the transaction has been conducted. Where a firm reference number or a Swift Bank Identification Code (BIC) exists, one of these codes must be used or, in the case that a customer/client has neither an firm reference number or a BIC, a unique internal code allocated by the reporting firm must be used and that unique internal code must be used consistently across all instrument types and platforms for that counterparty.”
This MiFID transaction reporting requirement is an explicit example of the growing intersection between reference data and compliance.In the case of the recent fine imposed by the FCA on RBS, “the bulk of the reporting failures arose when RBS staff used an incorrect code to identify counter-parties to transactions…”This is not a case of the regulation being unclear, nor is it a case of the regulation being difficult to comply with. But based on our experience many financial institutions may be at failing to comply for one of three reasons:
1) Mergers and acquisitions: The bank has acquired another bank(s) in the past few years.The takeover of ABN Amro by RBS resulted in “significant systems challenges” with “38 different transaction recording systems…and 3 different ARMs…” (FCA Notice)So the integration of an acquired entity resulted in duplicative reference data repositories and multiple transaction reporting systems.Since 2007, when RBS acquired ABN Amro, there have been well over a thousandlarge M&A transactions in the financial services industry so quite a few banks have the same issue – multiple databases and systems that must be aligned for accurate and effective transaction reporting.
2) Inaccurate Reference Data Repository: The bank’s reference data repository does not reflect M&A activity or other corporate events among its customers and counterparties. Reference data changes all the time and failure to keep it accurate will lead to a multitude of costly problems. Transaction reporting failures is just one.
3) Unsynced Reference Data Silos: The bank has many reference data silos which are not in sync. So while the bank is applying resources in one area to keep its reference data clean and accurate, this effort is not being spread throughout the bank. We’ve seen financial institutions where an entity reference data process was underway in multiple parts of the bank that were not communicating. Duplicative efforts are resulting in different versions of the truth.
The establishment of a global legal entity identifier (LEI) will help solve these issues, but the creation and adoption of the LEI is still some time away. In the interim,
“Effective market surveillance depends on accurate and timely reporting of transactions. We have set out clear guidance on transaction reporting, backed up by extensive market monitoring, and we expect firms to get it right. As well as a financial penalty, firms can expect to incur the cost of resubmitting historically incorrect reports. We will continue to take appropriate action against any firm that fails to meet our requirements.” – Tracey McDermott, FCA’s Director of Enforcement and Financial Crime
The fine imposed on RBS fine is similar to those given to Barclays, which was £2.45MM for 58MM errors (2009) and against Credit Suisse which was £1.7MM for 39MM errors (2011). It appears as if the FCA is on the hunt for these kinds of avoidable problems.
How to avoid transaction reporting fines
These kinds of reference data compliance failures can be easily avoided by establishing and maintaining an accurate entity identifier map for clients and counterparties. The severity of the problem can be readily assessed by sending Alacra a sample of your client and counterparty data, which we will run through our matching and mapping process and return to you a detailed evaluation.
Alacra’s reference data solutions help financial institutions improve the quality of their reference data repositories.With regard to transaction reporting, the Alacra Authority File contains accurate legal entity reference data and a comprehensive entity identifier map on all entities that have either an FRN or a BIC. Additions, deletions, and changes to this data are reflected in the Authority File each day. We also have a data cleaning service that combines proprietary matching software and our global research team to ingest a financial institution’s client and counterparty data, cleanse, update, and de-dupe that data and then deliver back a clean dataset with an appended entity identifier map.
To learn more about using reference data to meet compliance goals, contact us.