Building societies in the UK will be encouraged to share back office services under proposals released by the government yesterday.
The move will help building societies tighten financial regulations and help them cut costs through improved processing, but IT job cuts are innevitable.
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The Chancellor of the Exchequer Alistair Darling yesterday published the Reforming Financial Markets white paper which set out the Government's proposed reform of the financial system.
The government wants to introduce a model similar to that in many European countries where financial organisations share back office functions.
"The Government is interested in exploring the potential of these models for UK mutuals," said the white paper.
The Government will look at whether any of the continental models could lead to economies of scale for UK building societies and what the potential barriers could be. It plans to report its findings in the Pre-Budget Report.
David Sherriff, COO at financial services software supplier Microgen, said that unlike the banking sector, building societies gain no competitative advantage from having their own back office processes. Sharing back office systems would be unthinkable in the bank sector where back office processing is a key competitive differentiator.
"This is a good idea for building societies. If you put the resources of two or three building societies together you could develop better processes with better systems to adhere to FSA regulations."
Bob McDowall, senior analyst TowerGroup, said "This is a good idea but redundancies are innevitable."