A large number of financial institutions (FIs) have appointed chief data officers (CDOs) over the past couple of years. I know a few of them and while they come from a wide variety of backgrounds—some technical, some business, some ‘data geek’—they share a common belief that an organization’s data is one of its most important assets. They would like to be shaping their data agenda to help drive business growth, even business transformation. However, most of them find themselves fighting a rearguard action, focusing on the basics, laying fundamental foundations without which the ‘clever stuff’ is no more than a pipe dream.
Regulatory Focus on Data Governance
The agendas of conferences, seminars and webinars are dominated by topics covering the impact of regulatory change and the focus of regulators and regulations on data governance and data management.
You might want your data to become your most valuable asset, but first it needs to hold up to the scrutiny of regulators, tax authorities and courts of law.
- Banks have considerable work to do in response to BCBS Regulation 239 on risk aggregation and risk reporting. McKinsey notes that some of the principles laid down in this ‘set requirements that, in light of banks’ current capabilities, will be exceptionally challenging to meet.’
- Asset managers and insurers are facing similar challenges to meet the demands of Solvency II. Pwc are advising ‘With so much of the Solvency II implementation project resting on the quality of the data, now is the time to make data a priority and get preparations on track.’
Few organizations of any complexity will historically have adopted a common approach to data across all areas of their business. The much-vaunted challenge of establishing a ‘single view of the customer’ is just one consequence of this.
Data Governance is Affecting Profitability
More significantly, the challenge of establishing an accurate view of an FI’s aggregate risk exposure—to clients, to market participants, to countries or currencies—is significant and the challenge of proving this accuracy to the satisfaction of an inquisitive regulator even more so. Data architectures and governance frameworks that are less than robust are starting to have a direct impact on the profitability of FIs. Not only do they have to invest precious resources in fixing this, they are likely to have to set aside a greater amount of capital if their regulator is not convinced that they are on top of their data.
The executives and board members of FIs should be aware that the efforts of their CDOs are not just to help keep the regulators at bay. Other ‘enforcers’ could come knocking.
- To comply with the US Foreign Account Tax Compliance Act (FATCA) an institution will need to know if a client is a ‘US Person’ (as defined by the regulations) and will need to apply the correct tax treatment to the business they transact with that client. That is a data challenge. Incorrect classification of the client, or a business process’ disregard of the ‘gold standard’ record where the classification is correct, could lead to incorrect treatment and a tax liability.
- Most FIs will have robust Know-Your-Client procedures that help ensure they do not deal with parties that are subject to sanctions. How many have extended those to the more challenging problem of ‘knowing your instruments’, ensuring that they are not holding or dealing in instruments that are issued by companies that are subject to sanctions?
I think the defensive focus of CDOs is both inevitable and necessary. They can turn to the clever stuff once sound data foundations are in place to build on.
For now, the executives and board members of FIs should be supporting (and funding) their CDOs. You might want your data to become your most valuable asset, but first it needs to hold up to the scrutiny of regulators, tax authorities and courts of law.