In March 2019, the Financial Conduct Authority (FCA) of the United Kingdom issued substantial fines to two large banks—Wall Street Goldman Sachs and Swiss Investment Bank—due to inaccurate transaction reporting for all asset classes.
Goldman Sachs was fined £34.3 million (€39.7 million) for submitting reports riddled with errors related to over 220 million transactions over a ten-year period.
Swiss Investment Bank was fined £27.6 million for 135 million error-riddled reports in the same ten-year period.
ESMA enacted EMIR and MiFID II in an effort to mitigate risks and threats of market abuse and to increase transparency across the EU market. Therefore, these reporting regimes mandate that all firms, trade repositories, regulators, enterprises, and organizations submit reports and information related to the types of instruments used in all trading activities and transactions, when and how they were traded, and to whom.
It’s no secret that firms and regulators across the EU continue to struggle with EMIR and MiFID II reporting obligations. Through the years, a number of firms have submitted inaccurate or incomplete reports. As a result, the FCA and ESMA are now taking regulatory action, and issuing fines to firms in the UK as well as member states across the EU for inaccurate reporting.
In this article, we will review the different types of fines and sanctions issued, the root causes of reporting inaccuracy, and the lessons learned.
What Are the Different Types of Fines in Reporting?
After reviewing a number of fines issued over the last decade, the majority of firms have incurred fines due to the following reasons:
- Inaccurate reporting for all asset classes (Up to $1.57 million)
- Inaccurate reporting due to weak systems and controls (Up to £2.45 million)
- Failure to implement the necessary processes, resources, and measures to ensure reporting accuracy and validity (Up to £490,000)
- Failure to implement the necessary documentation, systems, controls, and staff training (Up to £205,128)
- Failure to submit reports altogether (Up to £4.7 million)
ESMA Issues Sanctions to Member States
According to a report published by ESMA in 2019, the National Competent Authorities (NCAs) issued approximately 371 sanctions, ranging up to EUR 50,000 to 750,000 to 15 out of the 30 member states within the EU/EEA.
Furthermore, reports also show an increase in the number of member states that were issued sanctions and where improvement measures were applied. The majority of these fines and sanctions were administrative in nature rather than criminal. ESMA authorities believe this is likely due to the significant amount of time it took firms to adjust to the shifting MiFID II framework requirements between 2019 and 2020, as well as the time it took for firms to implement processes.
What Are the Root Causes of Inaccurate Reports?
The truth is many firms that received fines have acted in good faith rather than out of malicious intent. Many firms are diligent with their report submissions, however, these attempts to deliver accurate reports under incredibly complex regulatory obligations have still resulted in inaccurate reporting submissions.
Therefore, with so many firms incurring fines due to inaccurate reporting, this begs the question: What are the root causes of inaccurate reports? What are the common threat areas that firms need to be aware of to mitigate inaccurate reporting risks?
The majority of inaccurate reports and data quality issues have stemmed from inadequate or insufficient systems and controls over transaction reporting. For example, the FCA and ESMA discovered issues related to:
- Reference data issues
- Insufficient change management processes
- Inaccurate or insufficient controls systems to test data samples and report submissions
As a result, the majority of these control issues continually result in inaccurate or incomplete reporting submissions.
Lessons Learned
It is possible that the last round of fines under the MiFID transaction reporting regime for failures to submit accurate and timely reports is over. However, it is likely that the FCA will now focus on auditing all transaction reports submitted under the MiFIR reporting regime, in which case we may see another round of fines and penalties, especially since the MiFIR is considerably more complex than the MiFID reporting regime.
The FCA has already warned firms, enterprises, and organizations about the data quality issues discovered in transaction report submissions under the new regimes as well as possible future consequences. It’s important for firms to be attentive to this warning, and to take the necessary actions, controls, and systems in order to improve the quality, timeliness, and integrity of transaction reports.
Additionally, although the NCA may not have issued sanctions or taken any measures for some member states called out in the 2019 report, this doesn’t necessarily mean that it didn’t take any enforcement action under MiFID II rules and requirements.
Finally, because ESMA’s belief that fines and sanctions were only issued to some member states due to the significant amount of time involved in shifting MiFID II framework requirements, it’s safe to say that more enforcement action will be taken in the future regarding issuing fines and sanctions to firms.
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All in all, the largest and most valuable takeaway is that firms must test reference data, change management processes, as well as the accuracy of their reporting prior to submission. By implementing sufficient controls systems and reconciliation processes, firms can not only gain more confidence in their reporting, but also avoid fines and sanctions altogether.
Is your firm at risk for incurring fines? By partnering with Point Nine, you can avoid fines as well as other reputational risks. Other firms were fined due to inaccurate and incomplete reports. Our regulatory reporting solutions thoroughly checks and ensure the utmost accuracy before submission.
To learn more about our robust and proven services and regulatory reporting solutions, contact us today for a free consultation.
