FSA pushes banks to make £1bn IT upgrade

The Financial Services Authority could order UK banks to spend nearly £1 billion on IT upgrades, so that savers can recover their cash quickly if a bank holding their money collapses.

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The Financial Services Authority could order UK banks to spend nearly £1 billion on IT upgrades, so that savers can recover their cash quickly if a bank holding their money collapses.

Banks would be obliged, under proposals, to create a single customer view showing each saver’s deposits and details, no matter how many IT systems contain the different data. They would also have to flag up the savers who are eligible for compensation if banks collapse.

The call came as part of a consultation paper that proposes a strengthening of the Financial Services Compensation Scheme, under which individuals’ savings are protected by the government up to the value of £50,000, in the event of their bank collapsing.

The idea is that if a bank fails it can create a single customer view for each of its customer’s deposits within two days, and as a result, savers would be able to recoup their cash within a week. The changes would mean a significant amount of data cleansing, the FSA said, but warned it was the only way to ensure savers could recoup their money quickly. The data that banks hold, was “not always accurate or complete enough to enable fast payout”, it stated.

Under the FSA’s proposals, banks will have to spend over £892 million during the next five years, including setting up the systems over 18 months to go live at the end of 2010, then maintaining the systems for the following three years.

The £892 million would be comprised of £438 million on creating a single customer view, £197 million on data cleansing, and £135 million flagging up account holders eligible for compensation, among other factors. The compensation scheme would have to make around £1 million of its own IT changes to adapt to the banks’ upgraded systems, the FSA said.

The FSA warned that the Financial Services Compensation Scheme could also reasonably be expected to request any bank to produce such a list within two days to test that the systems work.

“Without data cleansing, the [Financial Services Compensation Scheme] would have to contact a large number of claimants to seek further details and to check the accuracy of information before paying out. This would make a fast payout unmanageable,” the FSA warned.

Bob McDowall, research director, at financial services advisory firm Tower Group, said the technology changes would be "simply good housekeeping".

"Data cleansing, obtaining a single view of the customer, storage and retrieval of data are all simple issues where the banks have failed frequently to apply resources to good effect," he added.

But the proposal comes at a time when many banks are attempting to drastically cut IT costs. Financial services firms including HSBC, Barclays and Citi, among others, have made aggressive cost cutting moves.

"Most banks have already recognised that cutting IT spend isn’t the answer to the problems that they face, but the £1bn the FSA has estimated it will require will probably have come as something of a shock," said David Sherriff, chief operating officer at financial industry software supplier Microgen.

"At present there is still much reliance on manual processes and spreadsheets – a fact that can only have exacerbated the current crisis – and this has to be addressed for the industry to get back on an even keel."