Ross McGill

September 10, 2015|9 Minutes

XBRL – A Solution Looking for a Problem?

For those of you unfamiliar with the acronym, XBRL stands for eXtended Business Reporting Language. It’s a subset of the more commonly known XML. It’s essentially a set of rules and dictionaries to allow information to be standardised and automated. In several countries, XBRL is mandated in law so that certain documents must be submitted to regulators in this format so that the data they contain can easily be extracted and analysed.

If you want the XBRL for dummies version, it’s a bit like bookmarking a document. You can ‘tag’ certain parts of a document and, in the bookmarking analogy, you can then easily search that document for locations where that tag exists. In XBRL, the tags are essentially intelligent, allowing tagged data to be extracted by a computer. The important thing is to make sure that the person sending the document is using the same ‘dictionary’ to describe the tag as the person receiving the document. The result, in an XBRL world, is a machine-readable document that can contain much text, but from which, with the use of the dictionary and the tags, you can extract vital data for systems.

Take corporate actions announcements as a simple example. They are often produced as portable document format files (.pdfs). When they arrive at the first level of financial institution what happens? They are printed, manually reviewed, manually re-keyed into systems and the pdf then sent down to the next level where the same process is, guess what, repeated…and so on. This type of thing generates so much risk and error that an entire support industry (market reference data) has grown up to cross match and verify data downstream from its source. Most financial institutions are buying the same reference data multiple times, just to make sure they have a better than even chance of processing a corporate action properly. Insane.

Why is that important?

Unfortunately, we live in a financial ecosystem where over 80% of all corporate actions still involve paper, or where the information to be transmitted can’t be reduced to just data. Getting to the paperless environment requires two things – standardisation and automation. The problem is that, in the absence of a disruptive technology, standardisation and automation are historically complex, long-winded and expensive, especially in financial services, so the pace of change is glacial. If you look at ISO20022, you can certainly see that in spades. For the large financial institutions with big pockets and large human resources, such initiatives can be implemented, but the further down the financial chain you go, the more problematic such initiatives are to justify and implement.

There is actually a third requirement. You need at least one, preferably more than one, driver for change. There are two main drivers for standardisation and automation in this space. The first is risk and the second is regulatory. We are all trying to reduce risk (which also correlates to cost) in the industry. However, the effect of risk on standardisation is relatively small compared to the impact of regulation. I’ve always said – the simplest way to make sure a change occurs is to regulate for it. It’s interesting therefore that XBRL has been mandated by several governments, including the US and UK, for several years with respect to financial reporting, yet the financial services sector has not yet picked up on that trend. That seems amazing to me when you look at the key characteristics of XBRL versus a full ISO20022 (or even ISO15022) deployment. ISO20022 is expensive; XBRL is cheap (or free). ISO20022 is complex and long winded to implement. XBRL is simple, easy and fast. On top of all that XBRL developments are inherently ISO20022 compliant. All you have to do is define the dictionary. That means that everyone in the chain, large or small, upstream or downstream, already has the standardisation tool available.

The chains that bind us

So, given the obvious benefits and acceptance by regulators, why hasn’t XBRL been grabbed by the industry as an enabling and connective technology? The problem is simple. You may have the technology. You may have the dictionary (in XBRL its call a taxonomy). But, in the financial chain someone has to do the work of tagging the documents. In a perfect world that happens at the Issuer level – the corporations driving corporate actions announcements. However, the beneficiaries of such work are down the chain – the financial intermediaries and the investment community. In other words, the people who need to do the work to kick off a solution are not the ones who benefit from that work directly. There have been a couple of false starts – proxy voting was a candidate for this process, as was withholding tax on ADR dividend distributions.

We keep talking about the industry as a chain of intermediaries between Issuers and investors as if it’s a homogenous chain of parties with synergistic, and to some extent, altruistic service objectives. It’s nothing of the sort. The term ‘collaboration’ is also used so often, everyone misses the underlying subtext: ‘as long as it’s in my commercial interests.’ It’s clear that XBRL and any sort of top down standardisation model would represent an existential threat to many parts of the market reference data community because it would create the definitive golden record.

My observation is that, now more than ever, if the industry doesn’t pick up on these kinds of solutions more effectively, eventually a third party will come up with a solution that disrupts the industry and takes many thousands of people out of it – permanently. The reason the industry is falling over itself with block chain, for example, is not fundamentally because it’s a good idea. It’s because if it doesn’t do something about it, the technology will make much of the industry redundant (if you can’t beat them…). Perhaps the first player in the market reference data space to convince Issuers to tag their corporate actions information in XBRL (or do it for them) will be the winner that drives the rest of the industry into a more usable standard.

I mentioned before that regulators are already in this space. Their problem is that they historically don’t have a great track record of drafting workable regulations for us. They are also in silos just as much as the industry is. The US, for example, mandates financial reporting in XBRL but the IRS has not adopted a similar position with regard to FATCA reporting.

So, XBRL is out there. It’s a solution that can offer a relatively easy route to standardisation and automation and is inherently ISO20022 compliant. The commercial drivers are there. The regulators are pretty much on board because they’re already mandating it in other areas of their work. What we need now is a compelling Issuer level problem to which XBRL is the obvious solution and which either the Issuers or their agents can get behind. There’s nothing like a quick win to bring everyone to the table.

Ideas on a postcard…

Image Credit: CollegeDegree360

Ross McGill

Ross is the founder and chairman of TConsult. He has spent over 26 years working in the withholding tax landscape with companies developing tax reclaim software and operating outsource tax reclamation services.

Ross not only sees the big picture but is also incredibly detail oriented. He can make even the most complex issues simple to understand. He has authored 10 books (including two second editions) on various aspects of tax, technology, and regulation in financial services, making him one of the leading authorities in the world of tax.