Financial Transparency Act: Harnessing Untapped Benefits of Regulatory Data

Adopting data standards are especially important in the United States where the regulatory structure consists of separate regulatory agencies that have different missions and mandates. Each of these agencies has its own data and collection systems designed around distinct supervisory responsibilities. A significant step to rationalizing data needs and establishing standards across financial regulatory agencies is the Financial Transparency Act (FTA) H.R. 2989.  The FTA, introduced by Representatives Carolyn Maloney (D-NY) and Patrick McHenry (R-NC), would require Financial Regulatory Authorities [1] to adopt standards that: allow search ability, establish consistent formats and protocols; and provide transparency into data definitions and requirements.  The overarching goal of the Act is to:

“…to further enable the development of RegTech and Artificial Intelligence applications, to put the United States on a path towards building a comprehensive Standard Business Reporting program to ultimately harmonize and reduce the private sector’s regulatory compliance burden, while enhancing transparency and accountability…”

To accomplish this goal the FTA would require the use of common identifiers for transactions, legal entities, and products. While efforts have begun on legal entity and unique product identifiers, implementation and adoption has been a long process. Requiring the use of identifiers through the FTA should hasten adoption. To make these identifiers available throughout the private sector, the FTA would require that these identifiers be non-proprietary and available through open sources. The FTA requirement that data be searchable will make data more useful for the public and private sector by making data discovery easier and simplifying the capabilities to integrate these data into analytical tools through the use of industry and technology best practices. Data transparency will further be enhanced by the FTA by requiring metadata to be available, helping data providers and data users to have a clear understanding of the data definitions and context.  

Regulated entities in the financial service industry have long made clear the need for consistent data definitions and protocols within and between agencies.  Just as important has been the need to have standard cross jurisdictional definitions. By requiring data standardization, including the use of common identifiers, the FTA has the potential to significantly reduce the compliance costs for regulated entities, improve data accuracy, and improve the private sector’s access to regulatory data. All of which furthers the transparency of financial markets.  

High quality regulatory data, especially at large financial institutions is a continuing challenge.  An underlying cause of these data quality issues is the lack of uniform data standards across data sets and agencies requiring institutions to transform data to meet different regulators’ needs. This creates risk of misstatement, often from misinterpretations of the requirements and the use of manually intensive processes. This creates the need for intensive quality assurance processes and enhanced internal controls to insure the proper level of data quality, adding significant effort and risk at financial firms and regulatory bodies.  

Change management is another area where regulators and firms can benefit from the FTA.  Inefficient communication channel for reporting requirements of data requirements creates the risk of misinterpretation reporting requirements. For the most part, these requirements are communicated in regulations, reporting instructions, and statistical standards using plain English. The current model makes it difficult for firms, especially large complex firms,  to communicate requirements throughout the organization (from report preparers to data owners).  This increases the misinterpretation of reporting requirements that could ultimately result in non-compliance with regulations or formal supervisory actions. As regulatory requirements continue to grow and increase in complexity, the FTA requirement to provide machine readable metadata is the automation requirement elaboration is a critical step to improving data quality and improving change management processes. 

Data comparability is needed for financial regulators to fulfill their missions. Without data standards, obtaining comparable data to gain insights and apply advanced analytics is a difficult task.  While conceptually there is agreement for the need of adopting data standards. The number of financial regulatory agencies and their differing missions can be a significant obstacle to the goal.  This need was recognized when the Office of Financial Research within the Department of the Treasury was established and given a mandate to establish standards. While many regulators understand the need and benefit of data standardization, adoption has been slow. These efforts are often slowed by shifting data needs, the need to maintain legacy data sets, and the need to modernize technology capabilities. For example, it is only now the Legal Entity Identifier is being a requirement across financial regulators. This is why the FTA would be important steps forward. By requiring compliance with data standardization through legislation, will not only hasten the pace to standard data definitions, it should result in greater collaboration between regulators and between regulators and the private sector.

Now, more than ever there is a need for the FTA. The complexity and interconnectedness of financial firms has made data core to financial supervision. The need for standardization grows more crucial as the volume and velocity of data requirements increases. These data are crucial to understanding the activities and risk at financial institutions and markets. This has proven to be even more so in recent market stresses. Increasingly regulatory data are needed in near real time. Without standardization the effectiveness of processes and data quality will not meet regulatory expectations or needs. The FTA will be an important step in helping regulators and the private sector improve overall data capabilities of the financial services industry and its regulators.

[1] Department of the Treasury, Securities and Exchange Commission, Federal Deposit Insurance Company, Office of the Comptroller of the Currency, Bureau of Consumer Financial Protection, Federal Reserve System, Commodity Future Exchange Commission, National Credit Union Administration, and Federal Housing Finance Agency.

Kenneth Lamar is the Principal Partner of Lamar Associates LLC.  He is an Independent Senior Advisor Advisor AxiomSL.  Previously, Mr. Lamar was a senior official at the Federal Reserve Bank of New York acting as an Advisor to the Director of Research and Leading the Data and Statistics Function.