Why does FSCS compliance matter?

HSBC Bank plc (HBEU) and HSBC UK Bank plc (HBUK)’s January 2024 fine, imposed by the Prudential Regulation Authority (PRA) for historic failures in deposit protection identification and notification, alongside the 2023 United States banking crisis, jointly serve as stark reminders of the importance of depositor protection regulation.

Both events, emblematic of the broader challenges faced by the banking sector, underscore the necessity of rigorous data governance and quality for FSCS compliance and depositor protection.

HSBC’s penalty, the second largest imposed by the PRA, highlights the consequences of inadequate data management practices, while the 2023 US banking crisis, characterised by the failure of three small-to-midsize banks, reveals the systemic risks posed by liquidity concerns and market instability.

These incidents draw attention not only to the pressing issues of today, but also to the enduring mechanisms put in place to safeguard financial stability. The Financial Services Compensation Scheme (FSCS), established in the United Kingdom, embodies such a mechanism, created to instil consumer confidence and prevent the domino effect of bank runs.

What is Single Customer View (SCV)?

The FSCS’s role becomes especially pivotal in times of uncertainty: if a bank collapses, the FSCS’s compensation mechanism needs to activate almost instantaneously to maintain this confidence.

According to the Prudential Regulation Authority (PRA) Rulebook (Section 12), firms are required to produce a Single Customer View (SCV) — a comprehensive record of eligible guaranteed deposits — within 24 hours of a bank’s failure or whenever the PRA or FSCS requests it.

This response, underscored by the accuracy and rapidity of depositor information, is a bulwark designed to avert a banking crisis by ensuring timely compensation for affected customers. Over time, as the FSCS has amplified depositor protection to cover up to £85,000 per individual, the 24-hour SCV mandate has marked a significant stride towards a more secure and robust financial sector, solidifying the foundation where depositor trust is paramount.

What data challenges does SCV pose?

When it comes to implementing the SCV regulation, the devil lies in the details. The demand for accuracy and consistency in depositor records translates into specific, often arduous, data quality challenges. Financial institutions must ensure that each depositor’s record is not only accurate but also aligned with SCV’s granular requirements:

Below are 5 data challenges associated with SCV:

• Identification and rectification of duplicated records– Duplication can occur due to disparate data entry points or legacy systems not communicating effectively.
• Lack of consistency across records– Customer details may have slight variations across different systems, such as misspelt names or outdated addresses, which can impede the quick identification of accounts under SCV mandates.
• Data timeliness– SCV necessitates that data be updated within a 24-hour window, requiring real-time (or near-real-time) processing capabilities. Legacy systems, often built on batch processing, may struggle to adapt to this requirement.
• Discrepancies in account status — determining if an account is active, dormant, or closed — must be resolved to prevent compensation delays or errors.
• Aggregating siloed data– the comprehensive nature of depositor information mandated by SCV involves aggregating data across multiple product lines, account types, and even geographical locations for international banks, a task that can be formidable given the legacy data structures and the diversity of regulatory environments.

The HSBC fine, in particular, underscores the ramifications of inaccurate risk categorisation under the depositor protection rules and the insufficiency of stress testing scenarios tailored to depositor data. Without robust data quality controls, banks risk misclassifying depositor coverage, which could potentially lead to regulatory sanctions and reputational damage.

Why integrate SCV with wider data strategies?

By incorporating meticulous data standards and validation processes as part of an enterprise strategy, banks can transform data management from a regulatory burden into a strategic asset.

The crux of effective depositor protection lies not just in adhering to SCV requirements, but in embracing a broader perspective on data governance and quality. This means positioning SCV not in isolation but as a critical component of a comprehensive account and customer-level data strategy.

To overcome these challenges, financial institutions must not only deploy advanced data governance and quality tooling but also foster a culture of data stewardship where data quality is an enterprise-wide responsibility and not one that is siloed within IT departments. By incorporating meticulous data standards and validation processes as part of an enterprise strategy, banks can transform data management from a regulatory burden into a strategic asset.

An enterprise approach involves:

• Unified Data Governance Frameworks: Establishing unified data governance frameworks that ensure data accuracy, consistency, and accessibility across the enterprise.

• Advanced Data Quality Measures: Implementing advanced data quality measures that address inaccuracies and inconsistencies head-on, ensuring that all customer data is up-to-date and reliable.

• Integration with Broader Business Objectives: Aligning SCV and other regulatory data requirements with broader business objectives, including risk management, customer experience enhancement, and operational efficiency.

• Leveraging Technology and Analytics: Employing cutting-edge technology and analytics to streamline data management processes, from data collection and integration to analysis and reporting.

How does Datactics support FSCS compliance?

The recent HSBC fine and the 2023 US banking crisis serve as critical catalysts for reflection on the role of depositor protection regulation and the imperative of a holistic data strategy.

FSCS regulatory reporting compliance underscores the evolution of depositor protection in response to financial crises, whilst the challenges presented by these regulations highlight the need for advanced data governance and quality measures.

At Datactics, we understand that the challenges posed by regulations like SCV indicate broader issues within data management and governance.

Our approach transcends the piecemeal addressing of regulatory requirements; instead, we advocate for and implement a comprehensive data strategy that integrates SCV within the wider context of account and customer-level data management.

Our solutions are designed to support regulatory compliance but also to bolster the overall data governance and quality framework of financial institutions.

We work closely with our clients to:

• Identify and Address Data Quality Issues: Through advanced analytics and machine learning, we pinpoint and rectify data quality issues, ensuring compliance and enhancing overall data integrity.

• Implement Robust Data Governance Practices: We help institutions establish and maintain robust data governance practices that align with both regulatory requirements and business goals.

• Foster a Culture of Data Excellence: Beyond technical solutions, we emphasise the importance of fostering a culture that values data accuracy, consistency, and transparency.

We are committed to helping our customers navigate FSCS compliance, not by addressing regulations in isolation but by integrating them into a broader, strategic and more sustainable framework of account and customer-level data management. By doing so, we ensure compliance and protection for depositors whilst paving the way for a more resilient, trustworthy, and efficient banking sector.

The post FSCS compliance: The Future of Depositor Protection appeared first on Datactics.

 “Over the long-term, environmental, social and governance (ESG) issues- ranging from climate change to diversity to board effectiveness- have real and quantifiable financial impacts…” So noted BlackRock  chief executive Larry Fink in the wake of the Paris Climate agreement, following the United Nations’ (UN)  adoption of the Sustainable Development Goals.  

 Since Fink’s 2016 annual letter, the demand to expand the concept of fiduciary duty to include Environmental, Social and Governance (ESG) concerns has intensified amongst investors and legislators alike.  

 In Europe, Christine Lagarde, the head of the European Central Bank and Mark Carney, former governor of the Bank of England, have both long advocated the adoption of monetary policy and banking supervision to combat climate change, supported by the need for improved corporate disclosures. In Asia, the largest asset owners, including Japan’s Government Pension Investment Fund, are demanding investment managers better integrate the ESG criteria into their investment decision-making processes.  

The body of evidence to support the growth in sustainability focused investing is considerable and growing.  

 Morning star’s categorization of funds actively engaged in sustainable investing, boasts 204 members with $77bn in collective assets, with half of those funds launched in the last three years. In 2020 alone, close to 500 ESG funds were launched, with many investment managers announcing plans to force companies to cut their emissions and finance new projects.  

 Nor are investors and legislators alone in embracing a new model for corporate governance. Since 2018, the total number of firms that have committed to set emission goals in accordance with the Science-Based Targets Initiative (SBTI), a joint initiative intended to increase corporate ambition on climate action, has increased from 216 to over 1250.  

 At the same time, the number of organizations committed to disclosures framed by the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) has grown from 580 to nearly 1900. (The TCFD is an industry-led initiative created to develop a set of recommendations for voluntary climate-related financial disclosures.)

 Consequently, the demand for more accurate and more consistent ESG data to support investors in the portfolio securities selection process, has grown dramatically. That demand in turn has highlighted several significant complications.  

Complications  

A Kingdom of Loose Ends  

The first of which is the absence of a global regulatory standard designed to evaluate outward impacts as part of the investment process :

•  The Global Reporting Initiative (GRI), established in 1997, focuses on metrics that shows the impact of firms on society and the planet. It has been embraced by close to 6,000 firms worldwide.^[1]  
•  By contrast, the Sustainability Accounting Standards Board (SASB), which is gaining significant ground in the United States) includes only ESG factors that have a significant effect on a firm’s financial performance.^[2]  
•  The Task Force on Climate-related Financial Disclosures (TCFD) and the Carbon Disclosure Project (CPD) both focus on climate change—primarily companies’ exposure to its physical effects and to potential regulations to reduce carbon emissions.^[3]  
•   The International Financial Reporting Standards Foundation (IFRS) will present a proposal to the United Nations in November of this year to establish a global sustainability standards board.  
•    Finally, the European Union plans to adopt standardized processes through its Non-Financial Reporting Directive (NFDR) and Sustainable Finance Disclosure Regulation (SFDR). Both measures will form part of a broader suite of ESG initiatives designed to direct funding to genuinely sustainable, rather than so-called ‘greenwashed’ investments. These will  facilitate compliance with the Paris Agreement climate targets and the EU’s commitment to adopt the UN’s 2030 Sustainable Development Goals.  

 While investors rightly lament that the diversity of standards thwarts comparability, the lack of comparability between standards is a consequence of a more fundamental complication.  

  What to measure, what to manage  

  That is, the lack of regulatory consensus as to which ESG risk factors should be measured and how:  

• Of the three categories represented by ESG, Environmental criteria is the most mature, with a focus on active disinvestment in companies that produce many externalities—costs not captured in the manufacturing process—like carbon or waste or other forms of pollution.  
• Governance criteria, relating to how a company structures its board, disclosures, compensation and so on.  
• Whilst neither category is without difficulty, both pale in comparison to the difficulties posed by measuring social criteria. This often involves labor rights, compensation, and fatalities, as well as the ability to pursue a grievance; and issues such as the categorization of employees by gender and ethnicity. A study by NYU’s Stern School (“Putting the ‘S’ in ESG”) examined 12 of the most popular approaches, extracting more than 1,700 different measures required to assess a firm’s commitment to social sustainability alone.  

   Agreeing to Disagree  

Any future alignment of regulatory standards and agreed measures must be complimented by an improvement in the quality of available ESG data:  

• Current ESG ratings are immature, with scores often poorly correlated with each other.   -       Additionally, the current ratings focus on business models as opposed to the businesses themselves, thus diminishing the impact of what a firm sells, so long as it is manufactured and sold sustainably.  
•  The scoring systems often measure the wrong things and rely on incomplete, inaccurate figures. ^[4]  

Resolution 

 Better Standards  

 The proliferation in regulations has heightened the need to establish a common set of standards for ESG, equivalent to the Generally Accepted Accounting Principles (GAAP) used in financial reporting.  

 Here, it is essential that a dual mandate of Central Governments forcing firms to improve their disclosure commitments and Asset managers moving towards coherent and measurable objectives, is established.  

  In the direction of better standards, whilst political and regulatory roadblocks still stand in the way for US investors, the European Union has taken significant strides, having issued a suite of regulations, encompassing all asset managers, investment funds, and other categories of financial services firms.  

  Better Data  

 The widespread availability of quantitatively and qualitatively improved ESG data is essential in complementing traditional fundamental analysis.  

  Here, we are encouraged by the increased participation and investment made by larger data providers which, although still immature, should support those asset managers looking beyond the aggregated scores, intent on create their own  ESG ratings.  

Better Alternatives  

Finally, we are encouraged by developments in the direction of alternative data analysis, especially in regards the decision making surrounding social criteria:  

•  Thinknum Alternative Data, a research firm, evaluates reviews of companies written by members of staff, which has proven to be highly effective in discovering examples of corporate malfeasance, omitted from traditional disclosures, or overlooked by audits.  
•  The data company, RepRisk, analyses both articles and think-tank reports, its 2017 risk ratings for Johnson & Johnson, Purdue Pharma and Teva Pharmaceuticals already accounting for an impending opioid crisis long before its eventuation.  
•  The sentiment analysis of news and other media undertaken by Truvalue labs (now part of FactSet. )

 The growing criticality of ESG data to the investment process cannot be overlooked.

Improvements are being evidenced in standards, data contents, and data types seen as essential components required to support investors in the pursuit of two key areas:

1. More varied and nuanced ESG targets
2. The accurate quantification of inter-relationships between intangible, difficult-to-measure externalities.

While ESG adoption certainly remains in its infancy, the green shoots of spring are appearing once again.  

  What’s next?

In subsequent blogs in this series, you can expect to read about ESG reporting, the use of alternative data sets (or alt data), the impact on financial returns and the consequences for ESG investing.

^[1] According to Datamaran, 40% of S&P 500 companies cite GRI in their sustainability reports.  

^[2] 25% of S&P 500 constituents refer to SASB in disclosures, up from 5% 20 years previously.  

^[3] The popularity of both SASB and TCFD has risen in large part due to support from asset managers, including BlackRock and State Street.  

^[4]  Only 50% of companies within the MSCI world index choose to disclose carbon emissions.  

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