Financial services New regulations mean new challenges for IT
departments
Financial services companies may have been scaling back technology
investment over the past 18 months but a raft of imminent market
regulations is set to keep IT departments busy.
The regulations include a new banking code to tighten-up risk
management, international accounting standards and a registration
overhaul for the general insurance market. All have significant
implications for corporate IT systems and could cost tens of
millions of pounds in compliance costs.
From 2005, the International Financial Reporting Standards (also
referred to as the International Accounting Standards) will come in
to force for all listed companies in the European Union.
They will replace the Generally Accepted Accounting Principles
(GAAP) standards used by each country to prepare accounts. Their
introduction will affect more than 7,000 companies and their
financial information and accounting systems.
The idea is to make company financial results more transparent to
investors and analysts, making it easier to compare a company's
performance with that of other firms.
Experts have said that some countries' reporting rules will require
substantial changes to comply with the International Accounting
Standards.
The IT implications of the accounting harmonisation are
considerable, spanning data collection, system upgrades and
parallel processing.
Treasury, accounting and large enterprise resource planning systems
will be among the IT affected by the changes.
Experts believe that multinational companies, particularly those in
the financial services industry, will have to spend up to £20m to
comply with the standards - between 40% and 70% of this expenditure
will be IT-related.
Dual-reporting requirements will also place a further strain on IT
budgets and staff workloads. From the beginning of 2004, companies
will need to run a parallel set of accounts prepared according to
IFRS, along with a set prepared according to their existing local
GAAP standard.
"The biggest impact is going to be on the back office," said Jayne
Emberson, senior manager in the information risk management group
at accountancy firm KPMG. "New data will be collected for the
accounts and a lot of this data will originate from the front
office. You have to make changes to the front office to ensure the
data flows through. It will involve a lot of changes."
Software suppliers are starting to offer specific modules to cater
for the changes. However, the development process is being made
more difficult because the standards are still in draft form.
What the IFRS standards mean for IT
Classification changes: Financial instruments,
such as bonds and derivatives, will need a greater level of
definition within financial accounts, regarding their status. New
data fields will need to be created in the systems.
Disclosure changes: Under IFRS, more
information will need to be disclosed in accounts. For an insurance
company, financial statements should disclose details about actual
claims development compared with expected claims development, which
means the firm will have to collect new data.
Measurement changes: Measurement of assets,
liabilities and income will be measured in different ways under
IFRS. Assets and liabilities will need to be recorded always at
fair (current) value, and not historic value.
Source: KPMG
Challenges facing financial sector
IT
General insurance: From January 2005, the
general insurance market will be fall under the remit of City
watchdog the Financial Services Authority.
About 25,000 firms will have to register with the FSA in order
to trade. Firms will have to prove that they have adequate systems
in place to record sales, advice given to customers and information
on staff training.
Most firms will already have the necessary systems in place but
they may need tweaking to ensure compliance with FSA regulations.
Experts believe the pressure on life and pension providers to
comply with new regulations, coupled with the need to cut
administration costs, could boost demand for doing business
online.
"It certainly could be a boost for digital certificates," said
Mike North, senior consultant at insurance industry consultancy
Winchester White. "For example, in call centres the length of the
call is critical to the acceptability of the transaction from a
client point of view.
If you have to give more information about the product, it might
drive some of the processing on to the internet."
Basel 2: A fiendishly complex combination of
risk modelling and data capture, the New Basel Capital Accord,
commonly known as Basel 2, is due to be implemented by
international banks by the end of 2006.
The Financial Services Authority will inspect banking IT systems
and staff as part of a beefed-up international banking code on risk
management.
Banks that go for the more sophisticated levels of compliance
with Basel 2 will need to prove that their IT systems are robust
enough to meet its stringent requirements.
Analysts estimate that global banks will have to spend between
£20m and £100m to comply with the requirements of Basel 2.
IT challenges include linking a maze of banking databases and
reporting systems, updating older applications and ensuring data is
accurate. IT staff will also have to work closely with colleagues
in risk management and finance, in a project that has the potential
to make or break careers.
There are growing concerns, however, that the timetable for
implementing the new rules may be too ambitious.
XBRL: To its supporters, Extensible Business
Reporting Language (XBRL) is the future of financial reporting.
However, critics claim the emerging data standard is becoming mired
in complexity, which is slowing its adoption.
XBRL is a standard for the electronic distribution and
comparison of business reports. Aimed at City firms and private
investors, it enables a user to compare the financial performance
of groups of companies.
In a technology forecast published last month, accountancy firm
PricewaterhouseCoopers predicted that in three to five years' time
XBRL will become the accepted standard for reporting business
information.
While many IT and business leaders see the benefits of XBRL,
some industry experts have voiced concerns that the standard risks
becoming too broad. This creates lengthy XBRL tags to define data,
making it unwieldy to use and difficult to programme.
Another problem is the current lack of a common accounting
standard. XBRL is used to represent financial information prepared
in accordance with accounting standards. However, as the standards
vary, it may be impossible to compare company performance data -
one of the key drivers behind XBRL.