In an increasingly competitive and heavily regulated market, having good quality Management Information (MI) has never been more important for financial institutions. Senior management must have all relevant and up-to-date information pertaining to business performance to inform discussions and enable key strategic decisions to be made. In this blog, we explore five key principles that lead to excellence in MI to enable you to see how you measure up against the industry.
MI reports present this information all the way up to board level making it one of the main channels tracking business performance for a financial institution. Furthermore, the regulators recognise the importance of MI.
Increased regulatory focus
In the decade since the financial crisis of 2007-08, regulators have increased their focus on firms’ MI – not just on the regulatory returns but also on the bespoke reports that lenders are producing. And they are becoming more aware of some banks’ inadequacies in this area. Indeed, following a review of regulated firms’ consumer credit lending in 2017, the PRA stated "our main finding concerns weaknesses in management information and governance…”
Five key principles to master MI
The basis for any MI is the data underpinning it. Implementing best-practice data management techniques will optimise data quality and reporting accuracy. Automating the process for extracting data, aggregating it and populating the report allows more time for analysing and reviewing the results, as well as minimising the chance of introducing errors caused by too much manual intervention in the process.
Over the last few years, the Basel Committee on Banking Supervision (BCBS) and the PRA has moved much of its focus and challenge from banking models to the data landscape that underpins them. Whilst BCBS 239 currently applies only to larger banks it signals a movement towards an increased requirement for data lineage to support the information that underpins key decision-making processes in smaller organisations.
Good quality MI will include pertinent Key Performance Indicators (KPIs) to track all material risks within the portfolios. The number of KPIs should be appropriate to the size and complexity of the organisation, and to the audience for which the MI is being produced. KPIs will include a mix of total portfolio metrics, together with more granular analysis tracking specific groups such as recently booked accounts or concentrations in various risk sectors such as high loan-to-value exposures.
Commentary should clearly explain trends and their drivers, with appropriate detail – and not simply repeat what the audience can already see from the chart.
Sufficient history should be displayed, so that emerging trends can be differentiated from short-term blips. And definitions of each metric should be clearly understood, displayed and accurately labelled to provide a consistent view over time.
More is not always better … don’t be afraid to drop old charts when they become redundant or relegate them different forum once they are always skipped over at Board.
3. Solid Structure
Effective MI follows an intuitive structure, starting with an executive summary to pick out the key points, with more detail unfolding in a logical order. This could follow the credit lifecycle with earlier sections covering acquisition middle sections on account management, capital and impairment numbers, and later section on collections and recoveries but alternative structures, can also be effective.
Basic MI structures should remain relatively consistent for ease of understanding, whilst leaving room for new formats, spotlights on problem areas or deep dives into a particular topic to keep the subject matter fresh and relevant. Ideally there will be an appropriate balance between narrative sections, data-tables, and charts - and everything will be clearly laid out on the page without cramming in so much information that it becomes illegible.
We’ve all seen examples of bad reports, where the font size is tiny, there is a jumble of charts with too many lines, in clashing colours. Readers can start to lose confidence in the data if the authors of the MI don’t pay attention to how it looks.
4. Actionable information
The best MI is not just about the data, but it also provides the audience with useful and actionable information about how the portfolio is performing versus expectations. The arrears rate might be increasing, but how high is too high? Setting appropriate triggers linked directly to the organisation’s risk appetite can track how the portfolios are performing versus the agreed business strategy, with an action plan ready to be implemented in the event of any breaches.
Ultimately, the best Risk MI understands how each metric drives wider business profitability as well as managing the specific risk metric itself. Truly leading-edge Risk MI considers the interplay between risk and revenue and charts the best way forward for the business, re-assessing risk appetite when it is appropriate to do so and enforcing it rigidly when it is not.
Having a strong governance structure in place is crucial. The nature of this will vary by organisational size and complexity but it is important to match the level of detail of the MI with the governance structures. The Exec team may not want to review all characteristic-level population stability reports, but they want to know that someone has. At a minimum there should be evidence of stakeholder review and approval being clearly documented throughout the MI structures.
Larger organisations may have a central team responsible for coordinating the MI production and its onward submission to the regulators as necessary, as well as providing a useful challenge to the reports’ contents and commentary, but the responsibility for understanding what the data shows needs to sit with the business owner.
With lots of high profile initiatives underway like IFRS 9 implementation, and the emergence of exciting new ideas such as Artificial Intelligence, it can be easy to put “improving your MI” at the bottom of the to-do list.
However, firms that get this wrong could be on the receiving end of unwelcome feedback from the regulators. And getting it right can smooth the way for future developments such as moving to IRB status.