This is the second in a series of Point of View articles from Chartis and Regnology that explore the cost of complying with regulatory reporting requirements, and the context in which regulatory reporting is evolving. This article considers the pros and cons of the two main types of regulatory reporting system, and how RegTech solutions are helping to support a move to third-party offerings. The first Point of View article can be found here.

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Executive summary

Systems in financial institutions that monitor compliance and generate reports (see Figure 1) have had to change – the result of increasing regulation, changes to the regulatory reporting process and the emergence of new regulatory bodies. After the 2008 financial crash, reporting became a higher priority, and following the 2023 banking collapse regulations increased, and regulatory reporting took center stage in firms’ effort to minimize risk in banking.

This shift has stimulated a debate about whether organizations should use in-house or third-party solutions. Financial institutions’ change in priorities has given them a reason to re-examine their reporting systems and weigh the pros and cons of each type. In-house systems offer exact integration with existing systems, while third-party solutions come with the added feature of regulatory reporting. While large financial institutions with robust teams and long histories of maintaining in-house systems have been slower to adopt third-party solutions, a growing number of small and medium-sized firms have been inclined to move to third-party systems for their reporting and compliance needs. These organizations include banks and capital and financial markets firms with a variety of regulatory calculation and reporting obligations.

Over the years, the balance between the two types of system has been shifting away from in-house solutions, as third-party solutions have become increasingly affordable and accurate. This embracing of third-party systems did not happen overnight, however, nor was decentralization of systems and data the impetus. Typically, firms implement third-party systems because they provide a holistic solution for regulatory data management, regulatory calculations, the generation of last-mile reports, and the submission of these to regulatory portals. Financial institutions need no longer be concerned with how they secure and centralize the sensitive data they must report; the system that stores the data can also be used to report compliance and minimize non-compliance.

Aside from the major shift toward third-party systems and away from legacy in-house ones, there is a secondary tilt occurring, toward third-party systems with cloud capabilities. This trend is surfacing as the cloud makes way for managed services, which are playing a greater role in the compliance system decisioning process. Managed services, in this case, ease financial institutions’ responsibility for accurate and timely compliance by shifting this responsibility to a third party. With a cloud system, the third party, and anyone from the institution, can access the data and full system capabilities from anywhere. By combining data lakes and a cloud system, institutions can maximize efficiency and reduce time and effort, ensuring full compliance and the on-time delivery of reports to regulatory bodies.

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Context: the great debate ‒ in-house vs. third-party systems

Indeed, regulatory reporting has long been a feature of the debate surrounding in-house versus outsourced solutions. Many banks have struggled to find the right strategic solutions to help them stay abreast of increasing regulation and the need for compliance. Numerous institutions are still using the technologies they implemented after the financial crisis and are looking for innovative solutions to make reporting faster and more efficient across their organizations. Financial institutions have invested in multiple in-house systems based on their size and type, the business lines they support, the regulatory reporting required of them and the jurisdictions in which they operate. This has resulted in a tangle of systems (see Figure 2) that have been implemented without any strategic vision, and which are virtually impossible to scale when a new regulation is imposed.

In-house systems: pros and cons

While they offer unique advantages, in-house systems are becoming less popular, largely because of the associated costs, their lack of adaptability and the general trend toward cloud-based managed service capabilities (see Figure 3 and Table 1).

Third-party systems: pros and cons

Third-party systems are rising in popularity, mainly due to their accessibility, lower overall associated costs and the access they provide to managed services and expertise. Nevertheless, they are not without issues (see Figure 4 and Table 2).

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Market trends – the move to RegTech

Against the background of this debate, the trend is toward the use of third-party regulatory technology (RegTech) solutions (see Figure 5).

Currently, financial institutions require improvements across all their regulatory reporting components. Challenges and issues exist across the landscape, in such areas as data management, governance, processes and controls, documentation, and regulatory approvals and explanations. By making improvements in at least some areas, firms can ensure that the regulatory reports they deliver will be more accurate, helping them avoid hefty fines and reputational damage.

RegTech is an emerging technology area in which digital tools are used to make regulatory reporting and compliance easier by automating, streamlining and improving the management of firms’ regulatory requirements. RegTech uses digital technologies to enhance such regulatory workflow elements as monitoring, compliance and reporting, by standardizing and automating many manual activities, and helping to make the process more robust and economical (see Figure 6). These technologies can be expensive, however, especially if deployed on a stand-alone basis. To help financial institutions become more efficient, RegTech must be part of an integrated risk and finance architecture to truly add value and provide maximum benefit.

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