Errors and omissions notifications: the regulatory reporting confession letter

Errors and omissions notifications the regulatory reporting confession letter image

Regulatory reporting is hard, and mistakes inevitably do happen. But knowing what action to take once you’ve discovered errors and omissions in your reported data is equally challenging. Sometimes issues are found via internal means, but they can also be discovered by regulators who then begin asking questions.  At Kaizen, we regularly help firms in this position, supporting them with their communication to the regulator and correcting and re-reporting the transactions via our Accuracy Testing.  Here, we share some of our insights on errors and omissions notifications and what to do once your firm finds regulatory gremlins lurking.

1. Regulatory clarity – clarify your mis-reporting

Before enthusiastic (or defensive) emails are sent to the regulator, you must clarify exactly how deep the problem goes.  What volume of trades have been missed or impacted, over what time period?  Coupled with this is the need to understand exactly what the mis-reporting actually was.  Vague explanations will inevitably lead to further questions from a puzzled regulator.

At this stage of issue discovery, many firms choose to perform assurance and accuracy testing on their reporting population, to ensure that any other hidden powder kegs are uncovered well before further regulatory scrutiny prevails.  Independent assurance testing is the most efficient and complete way of undergoing such checks and can also help paint a good picture to the regulators when it comes to submitting an errors and omissions notification.

Regulatory reporting is the counterparty’s responsibility. Firms must be able to understand and explain why the reporting was wrong or incomplete. Importantly, this is true for those making direct reporting submissions to a trade repository/ARM/SDR, and it is equally true for those utilising a form of ‘delegated reporting’.

2. Preparing the Errors and Omissions notification

If you’ve completed the above, now it’s time to own up to all the things you’ve got wrong. To do this, most regulators expect firms to fill in an errors and omissions notification.  The ideal point to draft the notification is not the same for all situations. Generally though, only once a firm has performed satisfactory checks and is confident with the known scope of the errors, can the notification be drafted. The UK FCA Errors and Omissions form* and the Central Bank of Ireland’s form* are good starting points to illustrate what details you should include, but each regulator will have its own variation on this theme and some even simply ask for a free format email.

The notification should ideally confirm:

  • The full scope of the mis-reporting
  • Remediation steps undertaken
  • The cause of the issues
  • How these errors will be avoided in future.

The regulator needs to see that you have control over these issues and over the reporting in general.  Failure to demonstrate strength in this area will undoubtedly prompt the regulator to probe for more information and place demands on how and when further data is provided, often citing how and when remedial actions are carried out.

In our experience, it is exponentially better to provide all the information in advance. The motive here is to answer all the questions the regulator may have before they are asked.  Providing the bare minimum of detail, in an evasive or defensive manner, can backfire and lead to further scrutiny and the possibility of fines.  

In all cases, you should be ready for follow up questions from the regulator.  The more thorough and prepared you have been with your scope investigation, the more comfortable you will be in answering such questions. In addition, it’s important to remember that the aim here is to close out as many questions as you can before there is a chance to ask them.  Therefore, the deeper the dive in reviewing existing reporting quality and completeness, the better prepared you will be and fewer questions will arise.

3. Frequency and strength of notifications

In our experience, fewer but stronger, notifications is the optimal strategy here.  As mentioned earlier, the aim of the notifications is to demonstrate the strength of your regulatory reporting, and control over the errors at hand.  Some firms have legal and compliance policies in place to notify their supervisor for each and every error uncovered on an ad-hoc reactive basis. However when it comes to the regulator, too frequent notifications risk demonstrating a lack of control over issues and procedures, and can lead to further regulatory scrutiny.  Some regulators may request regular updates for known issues or existing independent reviews, but usually only for many errors across large data arrays.

Whatever frequency is explicitly committed to, you must ensure that any deadlines are adhered to, or give reasonable written notice with clear sensible justifications as to why a specific date is no longer feasible.

4. Remediating errors and other useful actions

Notifications should demonstrate an organisation’s remediation plans, taking into account factors such as technology build requirements, prioritisation alongside existing commitments, and it is always a shrewd move to add contingency for unforeseen delays.  Firms would also be wise to use this opportunity to:

  • Create or enhance deep, tailored and universal accuracy and completeness testing controls incorporating all fields and all reports submitted
  • Ensure supporting policies and procedures are up to date and fully cater to avoid a repeat of the identified issues
  • Check that reporting errors are escalated appropriately with clear and written action points for defined responsible stakeholders
  • Confirm access to the reported data from the regulator or trade repository/ARM/SDR which is regularly saved down for future endeavours
  • Engage in annual regulatory training to ensure that all impacted internal parties are up to date on reporting requirements.

5.  Final thoughts

Demonstrating the appropriate controls and strength of process regarding how you approach errors and omissions notifications, and the manner in which information is relayed to the regulator, is absolutely crucial to that working relationship, and will proactively influence the nature of any further regulatory scrutiny, fines or demands that follow. Having a well thought through errors and omissions notification policy will help ensure that communication with the regulator is open and effective.

  • If you find yourself in this position and would like a discussion with one of our regulatory specialists about this process, please get in touch.

*Both forms will download rather than open in a webpage.