Transaction reporting: the importance of getting it right
July 2019 | FEATURE | BANKING & FINANCE
Financier Worldwide Magazine
July 2019 Issue
Ensuring that transaction reporting is accurate and compliant has never been more important – a legal obligation that was brought into sharp focus by fines recently imposed on a number of high-profile firms.
In March 2019, both UBS AG (UBS) and Goldman Sachs International (GSI) were fined by the UK Financial Conduct Authority (FCA) for reporting failings. The former was ordered to pay nearly £27.6m and the latter £34.3m. In setting out its judgements in both cases, the FCA made clear the importance of organising and controlling transaction reporting, responsibly and effectively.
“GSI failed to ensure it provided complete, accurate and timely information in relation to approximately 213.6 million reportable transactions,” stated the FCA. “It also erroneously reported 6.6 million transactions to the FCA, which were not, in fact, reportable. Altogether, over a period of 9 and a half years, GSI made 220.2 million errors in its transaction reporting, breaching FCA rules.”
In terms of UBS, the FCA found that, over the same period of time, the firm “failed to ensure it provided complete and accurate information in relation to approximately 86.67 million reportable transactions”. UBS also erroneously reported 49.1 million transactions to the FCA. Ultimately, UBS was found to have made 135.8 million errors in its transaction reporting.
In summing up both cases, the FCA stated that: “Firms must have proper systems and controls to identify what transactions they have carried out, on what markets, at what price, in what quantity and with whom. If firms cannot report their transactions accurately, fundamental risks arise, including the risk that market abuse may be hidden.
“Effective market oversight relies on the complete, accurate and timely reporting of transactions,” it continued. “This information helps the FCA to effectively supervise firms and markets. In particular, transaction reports help the FCA identify potential instances of market abuse and combat financial crime.”
Damon Batten, a managing consultant at Bovill, considers transaction reports to be vital in order for the FCA to have effective market oversight. “Reports provide valuable information that can identify potential market abuse, insider dealing and market manipulation. Monitoring the effectiveness of transaction reporting processes and assessing the completeness and accuracy of reports has always been something firms are expected to do. Effective transaction reporting processes, systems and controls are a useful way for firms to demonstrate that they take the fight against market abuse seriously.
“While the volume of transactions undertaken by UBS and GSI is likely to have been a factor in determining the fine imposed, the FCA will also have considered the time period that the breaches covered,” he continues. “It is particularly concerning that the firms did not have adequate systems and controls in place to make sure that their static data and the content of their transaction reports was complete and accurate. Another consideration the FCA will have had when assessing the severity of the issues at UBS is the fact that they were also fined in 2005 for transaction reporting failings. Some might say UBS did not heed that warning.”
The financial penalties imposed on UBS and GIS, as well as the associated undermining of organisational credibility, stand as a timely reminder to all firms with transaction reporting obligations of the need to review their reporting processes to ensure they pass any future audit.
Monitoring and controlling
With the FCA fines highlighting the ineffectiveness of the reporting regimes of firms such as UBS and GIS – high-profile multinationals one would expect to have resources that provide considerable oversight – the extent to which transaction reporting needs to be systematically monitored and controlled becomes abundantly clear.
“It is crucial that firms create a robust framework to control their transaction reporting, particularly because of the FCA’s view that its receipt of transaction reports is key in ‘protecting and enhancing the integrity of the UK financial system’,” says Simon Appleton, director of regulatory consulting at Duff & Phelps. “The FCA and other regulators rely on transaction reports to identify incidents of market abuse, but the data also helps the regulators with broader firm supervision and market supervision.
“The effectiveness of each firm’s transaction reporting systems and controls varies widely and in our experience does not seem to be linked to the size of the firm,” he continues. “Although it is not difficult to build an effective control framework, the regime is complex and we have identified reporting errors during every single one of our reviews.”
More forthright is David Nowell, senior regulatory reporting specialist at Kaizen Reporting: “Quite simply, it is the law,” he says, bluntly. “The requirements for adequate systems and controls over transaction reporting are very clearly detailed in regulatory technical standards. The Markets in Financial Instruments Regulation (MiFIR), demands that firms’ transaction reports are ‘complete and accurate’.”
Thus, if firms do not have robust systems and controls in place, they will be unable to ensure the completeness and accuracy of their reporting. “This will impact the regulators’ ability to uphold the integrity of the markets – something that the FCA has demonstrated that it will not tolerate,” Mr Nowell points out. “Unfortunately, many firms are at risk as they do not have adequate controls.”
In the view of Nicola Green, a managing consultant at Bovill, that fact that the MiFIR requires firms to cancel, correct and resubmit transaction reports when they identify errors or omissions, cranks up the pressure on them to provide complete and accurate reports. “The FCA has noted that this does not happen in all cases and reiterates that without accurate and complete data, their ability to carry out effective market abuse surveillance is impeded,” she explains. “When errors or omissions in transaction reports are identified, firms must notify the FCA. But the regulator is concerned that firms are correcting reports without notifying them of the errors or omissions identified using the correct notification form.”
As the fines imposed on UBS and GSI by the FCA make clear, the sanctions firms face should their reporting function fail to pass muster are substantial. Ergo, the effectiveness of firms’ systems and controls needs to be fully assessed and routinely monitored.
“The FCA has a number of enforcement mechanisms at its disposal, including private warnings, imposition of Section 166 notices – which requires a ‘skilled person review’ – fines and action against individual senior managers,” says Mr Nowell. “The UBS and GSI fines demonstrate that the FCA has a strong appetite for sanctions for transaction reporting breaches.
“It should also be noted that the FCA has developed tools to proactively identify inaccurate reports and can demand the back-reporting of any missing or incorrect reports,” he continues. “The cost of this remediation should not be underestimated – it will often exceed the costs of establishing adequate controls.”
Historically, the FCA has tabulated penalties based on criteria of £1.50 per line of incorrect transaction data – a seemingly inconsequential sum that quickly adds up when applied to thousands of pages of erroneous documentation.
“The longer reporting issues go undetected the larger the fine, hence the importance of conducting a transaction reporting health check as soon as possible,” says Mr Appleton. “Going forward, the Senior Managers and Certification Regime (SMCR) will potentially lead to senior individuals being pursued by the FCA for their firm’s transaction reporting failures. The fines imposed on UBS and GSI show the seriousness with which the regulator treats this matter. These are very big fines for what could be seen as largely administrative errors.”
For Mr Batten, the fines imposed on UBS and GSI serve as a timely reminder of how important it is for firms to get their transaction reporting right. “The fines illustrate that having a good transaction reporting reconciliation process is a money-saver – both in terms of reducing the risk of fines and regulatory sanctions, as well as avoiding the need for costly resource to be used for back reporting and remediation,” he says.
With regulatory oversight and enforcement unlikely to abate in the years ahead – if anything, it could escalate – firms need to have adequate systems and controls in place.
According to Mr Nowell, there are four main measures that firms need to take to meet increasingly onerous regulatory demands: (i) establish and maintain a control framework covering process documentation, steering groups, accountability and training; (ii) quality assurance testing of all reportable data to identify incorrect transactions; (iii) reconciling all trades in front office books and records against data received by the regulator; and (iv) testing of counterparty and instrument static data for accuracy and completeness.
“Prevention is cheaper and far less unpleasant than the cure, particularly if you are a senior manager accountable for transaction reporting,” asserts Mr Nowell. “There is a strong political will across Europe for clean and orderly markets, so regulators will be relentless in policing transaction reporting regulations. There will be further iterations of regulatory processes to ensure regulations evolve with the market, so firms also have to evolve accordingly.”
Looking to the longer term, Mr Appleton envisages a greater use of technology by regulatory authorities. “Distributed ledger technology could be used to enable regulators to interrogate firms’ databases directly without the need for the mass reporting of transactions,” he suggests.
In the meantime, however, Mr Appleton advises firms to prioritise a review of their transaction reporting control frameworks, utilising what he considers to be the key pillars of a strong control environment: ownership and communication, knowledge and understanding, oversight and control, and documentation and change management. “There is a significant amount of detail behind these pillars, but it is possible for firms to future-proof their control environments and prevent enforcement action if they treat it seriously,” he concludes.
Ultimately, for regulatory authorities, transaction reporting is an essential tool for monitoring the market for signs of potential abuse. For firms that execute transactions in financial instruments, it is a task that demands the height of completeness and accuracy. Invariably costly, transaction reporting failures can lead to significant fines, time-consuming reviews and, perhaps most importantly, reputational damage.
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