Good Documentation Matters for Financial Firms

Good documentation still matters for firms in the financial sector in this online age. This blog explains why.

There is so much more riding on it now. More complexity to explain. More choice for the consumer to get her head around. More personal accountability for executives, non executives and public officials.

More risk, more threats, with more potency, that governments, regulators, firms and consumers need to understand and mitigate.

Clarity is the key to that understanding and mitigation.

Good documentation delivers the clarity we need to make the right choices and navigate the complexity.


It’s a complex world we live in

Technology advances have made things easier for us in many ways. But the modern financial world remains complex, and changes more rapidly every year. The products, service providers, delivery channels and risks we need to understand are increasingly hard to understand. Whether we are professionals, consumers or officials.

Now the regulators are working hard to ensure that where as consumers we really need to understand things – financial products that really matter to us and our families’ future well-being – they are explained to us and understood more clearly.

But the volume of information is huge. How much of it can we truly assimilate? How much of what we read do we truly understand?

Taking a cynical view, how much of the information we sign up to is there to limit someone’s future legal liability? A kind of Caveat Lector?
Reader beware.
You signed the doc
Without a care.
Now absorb the shock.

I don’t actually believe that cynical model. I think the efforts of the regulators to push for clearer, smarter communications – both their own and firms’ – are genuine and well-founded.

Certainly so far as consumers are concerned. In 2015 the UK Financial Conduct Authority issued a discussion paper

FCA Discussion Paper June 2015 – Smarter Consumer Communications

which outlined some sensible practical ideas in a range of areas that would benefit consumers.

This included terms and conditions, general insurance terminology, investment advice and pensions, and even knowing how and who to complain to, and how they might be covered if things go wrong.

In all these areas the regulators saw scope for improvement. And they weren’t afraid to highlight examples of good practice that other firms might follow, and to make practical suggestions of their own.

Corner Stone

We all have more skin in the game

So much for consumers. They seem to have someone on their side, genuinely, understanding the problem of increased complexity and trying to make a difference.

But what of the rest of us, professionals and officials, executives and non executives? We also face issues with growing complexity and risk but – rightly – don’t enjoy the same level of protection that consumers increasingly do?

Many of us now have more downside, more legal liability, more expectation from regulators, more to lose than before. And that’s not just to do with expectations of better behaviour and the exposure we face – rightly – from any misbehaviour. It’s also to do with expertise. Our basic ability to carry out the oversight or governance roles that are expected of us. Our professional competence, if you like, in a world where it is becoming harder to keep up.

We all face more risk, whether as professionals or as individuals: economic, political, financial, regulatory, legal, technological, business, health. We face greater cyber risks than ever before. And we are facing rapid and advanced technological developments in areas that threaten or change the whole way we do business and the way we interact with each other, with markets, with consumers and with regulators.

We will cover Fintech and Blockchain in future blogs. For now let’s just view them as big innovations that will change – are already changing – the world of financial services fundamentally.

Whether these innovations are risks, threats or opportunities – or all three – we need to understand them as professionals, for the good of our firms, our careers and our industry.

So how are we supposed to get our heads around it all? How are we, our Boards of Directors, regulators and governments meant to understand and mitigate the risks and threats? And to recognise and optimise the business opportunities that they represent?

My simple answer is: let’s start with the documentation, And by insisting on clear exposition and great presentation from friends, colleagues, clients, firms and officials on the complex topics and risks. Good exposition aids understanding. And good understanding is surely needed.

Kings Cross Concourse

Whoever we are, we can explain better

Every day different professionals in the financial sector are producing and commissioning documents that really matter.


The regulators themselves (and their regulator in Basel) are drafting critical new policy guidance which will shape the global economic framework for years to come. I don’t exaggerate. Dodd-Frank and Basel 3 are doing just that already, And the BIS Fundamental Review of the Trading Book will completely alter the way banks and capital market firms do business. The rules themselves needed to be clear. Now the onus falls to the national regulators to implement them as clearly as they can. They must avoid unintended consequences and maintain the much-desired level playing field.

Each day, regulators globally are producing reams of draft and final proposals, rules and standards. Each week, firms are writing application or submission documents to obtain a particular treatment or interpretation or approval within the rules. Correspondence between regulated firms and those who regulate them is an industry in itself. All those documents have to provide clear exposition to their audience. They need to mitigate confusion, aid implementation and ensure a good outcome for all parties. And that is not to mention disclosure statements, which hark back to the consumer we talked about earlier. Each year there is more mandated need for disclosure around business, risk, culture, conduct and policy.

All these things need to be comprehensible to a wide range of parties. But volume of disclosure does not cut the ice. Clarity of disclosure does.


Next we turn to the Boards of Directors of our financial institutions. These men – mostly still men though that will change – are plied every day with committee terms of reference, minutes and ever more complex and detailed Board presentations, papers and reports. All of these they have a professional duty to read, digest and challenge; and a personal liability alongside that professional duty.

It is hard to sympathise with these people at the very apex of our financial system but I ask you to suspend disbelief and see it from their point of view.

The regulators have been on this case too, setting out guidance on how to square the circle between complexity and ever growing responsibility. Comments made last November by Andrew Bailey, soon to be CEO of the Financial Conduct Authority, are instructive:

So, how do we square the responsibilities with the complexity? Not by drowning in complexity, or by doing a Canute and trying to tell it to go away. For Boards it means having a certain level of understanding, not at the level of the maths of a Copula. The key challenge for all of us is to be able to boil the complexity down to understand what are the key drivers – which judgements are likely to matter when bad things happen in the tail of the distribution of risks.
This is a description of one of the hardest things in many walks of life – how to explain complex things in simple terms. In the Bank of England, it is a challenge we face regularly in terms of explaining complex areas of public policy – it’s the same issue for our judgements on monetary policy.
So, let me put forward a proposition for Boards. It is the job of the Executive to be able to explain in simple and transparent terms these complex matters to Non-Executives. In doing so, you should understand the uncertainty around judgements, in what circumstances they could be wrong, and how there can reasonably be different ways to measure things like liquidity. Non-Executives should not be left to find the answers for themselves, and they should not feel that they have to do so out of a lack of sufficient confidence in what they are being told. In other words, they should not be pointed towards the haystack with warm wishes for the search ahead.

The message from one of our most senior regulators is very clear. We need to convey complex information, as best we can, in simple transparent documentation.

Executive Management

Last we turn to our senior executive managers. These people run ever larger and more complex organisations and require an ever more complex paper trail to keep track of it all. Not least to prove to the regulators how well they are keeping track of it all. Forests of paper are produced every day in our financial institutions. These cover topics like strategy and business plans, Audit benchmarks, plans, reports and management responses, internal model and methodology documents, policy and procedures by the dozen, manuals, organisation charts, process maps, white papers and position papers. Not to mention marketing and training materials, project documents, business requirements documents, internal funding proposals, technical specification documents.

The list goes on. Check out the infographic below to find some I may have missed.

The message is that our needs for documentation – outside the consumer world as well as in it – are varied and complex. And the same themes and expectations apply. The documents need to be transparent, sustainable and most of all completely comprehensible to a someone who is not an expert in the field. Complex matters simply conveyed. Clear on the key drivers, clear on the degree of any uncertainty surrounding the issue, clear on the risks in the tail.

The last section of this blog now looks at some examples in practice. Why does this stuff matter? Who really cares and why? What kind of documents, in practice, are finance people straining to write every day, to fulfil these new higher expectations of clarity and transparency.

Prism Clarity Wordcloud

Documentation in practice


Pillar 2 Capital, Stress Testing and ICAAP (CCAR in the US) are vital supervisory tools for regulators and banks worldwide. But often risk and capital managers do not have the bandwidth or the skillset to document them with the transparency and skill they deserve.

A Pillar 2 Liquidity regime (ILAAP) is now on the agenda for many UK-incorporated banks. The regulators are migrating their liquidity supervision to the new Basel and European regime including Pillar 2 internal stress buffers, similar to the capital regime. This involves a further major round of internal documentation, governance, review and supervisory approval for many firms.

Accordingly firms are now having to refine, deepen and professionalise their ICAAP and ILAAP documents and analysis. Ranging from policies, assumptions and processes to results, projections and action plans. They need to aim for high transparency and sustainability, ensuring clear connections between the documents and their internal data sources. This ensures better governance and better understanding of the material among both senior managers and regulators. Eventually this leads to an improved regulatory outcome, meaning lower capital and liquidity costs and a better return for shareholders.

Trading Book Capital: FRTB

The Basel Fundamental Review of the Trading Book (FRTB) will involve a major re-documentation exercise between now and 2018 in a wide range of areas such as revised standardised capital calculations, desk level model analytics and testing, and risk factor modellability, among others.

Banks’ programme managers are already looking to write, review and refine FRTB documentation as the project goes along. This includes drafting some elements from scratch and ongoing programme of documents on policy, processes, analysis, results and regulatory submissions. This programme will require funding proposals, business requirements documentation and detailed IT specifications. All of this will need to be documented in the clearest fashion possible given tight implementation timelines and the groundbreaking nature of the new rules. We can safely guarantee that transparent documentation in these areas will prove critical to business success.

Recovery & Resolution

All EU member states are now required to implement a Resolution Regime for systemically important market infrastructure firms. These rules will contribute significantly to the structural banking reform programme currently under way across the EU.

More widely, as part of the drive towards greater bank resolvability under the Recovery and Resolution regime, regulators worldwide are placing great emphasis on banks’ internal booking model documentation. This includes legal entity-to-product booking maps, remote booking policy and procedures, and rationale for exceptions. The regulators’ aim is to reducing banks’ optionality in booking different product types in different entities, and ensuring good transparency and governance. Many banks’ documentation in this area is poor in quality, if it exists at all.

On the regulators’ side, it was important that the regulatory agencies ensured clear unambiguous drafting of the national requirements for implementing this new regime; to eliminate scope for ambiguous interpretations and reducing the cost of implementation along the way.

On the banks’ side, to implement these changes banks need to review their existing documentation end-to-end. They need to ensure clear explanations of the rationale for particular booking structures, strong data links to ensure sustainability, and strong guidance and governance around remote booking. They need to demonstrate how they monitor adherence to these important processes, supported by clear, appropriate escalation and reporting.

External Disclosure

Disclosure Statements which clearly describe key risks and business developments to shareholders and the wider public are a growing trend and governed by strict standards. Additional disclosures will be required under the FRTB and other regulatory mandates.

Firms’ business and legal disclosure teams are working to ensure high quality drafting prior to internal sign-off, testing for an appropriate balance between detail and comprehensibility.

External Audit

Independent External Audit analysis and reporting remains a critical element of the control systems required for all regulated financial firms. External Audit reports need to be sharp, accurate and to the point, yet also to reflect appropriate business context and awareness of firms’ prevailing culture and the workplans instigated by executive management to address identified control weaknesses.

External Auditors and with Executive Management need to ensure balanced appropriate wording of both Audit Points and Management Responses, such that the final Audit reports appropriately reflect the firm’s day-to-day control environment.

Rules and Standards

In 2016 the European Banking Authority (EBA) is expected to publish its key report on the phase-in of the Liquidity Coverage Ratio (LCR) and its appropriateness for EU firms. The LCR is a key requirement of the Basel 3 regulatory regime and currently undergoing a phased implementation. Meanwhile the new FRTB Rules also need to be implemented in Europe over the next two years. These Rules will transform the way banks manage and calculate their trading book capital, and could fundamentally impact market structures and the price and availability of real economy financing

It is important for both of these rule sets – given their importance for the real economy as well as for banks – that clear implementation guidelines are set by the EU and that it avoids unintended consequences in all reports, directives and regulations that pertain to these Rules.

Typewriter and Glasses

Policy & Procedures

The Policy Document and her ugly sister the Procedures Manual have never been more necessary or more difficult to get right. Getting the right level of detail in a principles-based Policy is hard. Conveying the right culture and expectations in a few pages while avoiding unnecessary detail and the risk of decay and obsolescence in such a rapidly-changing environment is very hard.

We will be talking more about this in a future blog: Policy is important enough to justify this. Although often viewed as the dullest and most bureaucratic of all areas of documentation, this needn’t be. Good Policy should be right at the heart of a firm’s control framework. Procedures are vital for conveying to regulators both important substance and a message about how the firm manages itself and conveys its culture down and across itself.

Board Reporting

Implementing the new Senior Managers Regime is a key priority for the Bank of England and Financial Conduct Authority over the next year. As part of this the regulators are increasingly focused on the effectiveness of Board Reporting and the extent to which it supports effective governance, especially from the point of view of Board Non-Executive Directors (NEDs). Many Board reports are too detailed to be useful and not sufficiently focused on highlighting key business and risk issues.

Firms are refocusing their reporting teams to refine and develop summarised effective Board Reporting materials. These need to provide sufficient context for NEDs as well as highlighting key risks and business developments. Many firms are encouraging more visual and summarised presentation to supplement or replace current detailed report sets. And trying to ensure their reporting is completely aligned to key internal capital and liquidity management documents (such as ICAAP/ILAA) so that Board Reporting metrics fully reflect the risk and liquidity appetite of the firm.

Model Validation

Independent Model Validation is increasingly relied on as a key control by management boards, shareholders and regulators. Clear documentation relating to the type of model testing done, the results, conclusions and limitations, and any follow-up action plans required, is now a central requirement for regulators, auditors and other stakeholders who may not have the expertise or bandwidth to conduct full independent testing for complex products or models themselves. Yet model documentation is often drafted late, without much thought for the non-expert reader or an audience outside the firm.

Model developers are now expected to provide full, clear, accurate model documentation before products or models even go forward for internal validation. Independent validators and model governance teams then need to ensure they write clear, simply drafted documents highlighting the testing work they did, and related results, conclusions and limitations, in a manner comprehensible to the non-technical reader as well as the Physics PhD.

Internal Audit

Internal Audit is of course a vital independent control but Internal Auditors are often stretched to complete their fieldwork and review programmes on time to meet internal and regulatory expectations. And these days they need to plan and benchmark to a complex degree, to an exceptionally detailed and professional standard.

Professional experts are increasingly helping to relieve the burden on the hard-pressed Internal Auditors, supporting them in the critical planning and benchmarking work, and then in the time-consuming but essential process of proofreading and editing draft Audit reports. This leaves the Auditors themselves more time for substantive review, analysis and interaction with their business partners.


Effective comprehensive internal staff training is an important vehicle for embedding a strong risk and business culture across financial sector firms. Training materials need to be broad yet targeted, comprehensive yet retaining key messages and takeaways, and correctly pitched in terms of degree of difficulty. These balances are difficult to achieve, but can be achieved via a rigorous approach to review and editing of individual firms’ bespoke training material.

Firms are increasingly working with their external training providers and internal experts to ensure balanced, comprehensive yet targeted training materials focusing on key messages and sustainability.

Industry representation

Industry representation remains a vital function to ensure the voice of the financial sector is heard at high levels of government and the regulatory community. Research papers which analyse the impact of particular proposals on the real economy can help to counter unintended consequences and ensure a clear and balanced understanding among government officials and regulators who may not have a detailed understanding of the impact of their proposals. This kind of work can also support the ongoing objective of a level playing-field between firms from different jurisdictions and market sectors.

This is why trade associations and other industry bodies are always looking to ensure clear consistent positioning and messaging on particular proposals where the industry voice needs to be heard; focusing on clear understanding, impact and avoiding unforeseen or unintended impacts.

Tile Pattern

What Does It All Mean?

The above illustrations are just a few concrete examples of the areas where transparent sustainable documentation is still – or is increasingly – needed in the complex world of financial regulation and banks’ internal governance and executive management.

The short paragraphs above themselves illustrate part of the problem, in a way. Financial regulation, governance and business is complex, yes, but is also rife with jargon, prone to consultant-speak and frankly often hard to understand.

This is true even for practitioners, managers and non executive directors.

And if they can’t understand it, how can the public, or parliament, or other people holding the industry to account?

There is only one answer: push for more clarity and more transparency. Ask more questions, in a spirit of seeking clear answers. The stupider the question, the better: remember the adage “No question is a stupid question”. Let’s challenge ourselves and the people inside and outside our organisations who write our documents and provide our critical information, until we understand. Let’s not being satisfied with documentation that fails to tell the clear story.

We hope Prism-Clarity can help you to achieve these ambitious but important goals.