Financial services IT departments are creating higher costs in the long run by implementing short-term fixes to meet a deluge of regulations.
Banking regulation is an industry in itself, with 140,000 pages of regulations that affect UK banks published over the past two years.
David Sherriff, CEO of financial services IT supplier Microgen, said banks are using in-house IT teams or manual resources to create short-term fixes to meet regulations, which will only add to the complexity and cost of strategic programmes to meet regulations when they are implemented.
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He said short-term fixes have become more prevalent since the financial turmoil in 2007: “For example, organisations are putting in place systems to manage liquidity, and another that is not integrated for risk. They are also often using different sources of data that are not connected.”
This will make it more complex to move to a single system, he said, because there will be more data sources and historical transactions.
Banks need better direction on regulatory requirements
Alex Kwiatkowski, research manager for EMEA banking at IDC, said banks take a short-term approach to regulatory compliance because they are left to decide how to meet regulations.
“Lawyers write regulations that other lawyers can understand, then the operational people get the regulation and have to turn it into a product,” he said. "This might mean making tweaks to infrastructure or changing business processes.”
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Regulations tell the banks what the legal expectation of them is, but do not actually explain how they should meet this obligation, said Kwiatkowski. “Meeting regulation is just seen as a cost, and banks will do it as quickly and cheaply as possible.”
But this is an outdated model, he said, and banks will increasingly have to change as regulators begin to look more closely at what banks are doing: "In the new banking era, the quick-fix might not be enough."
Communication between banks and regulators improving
This change is seeing more dialogue within the banking industry between banks and regulators.
Brian Mairs, strategic communications officer at the British Bankers' Association (BBA), said there is regular, constructive dialogue between the banks and regulatory authorities.
“There is an established direction of travel on change. Everybody understands what needs to be done," he said. "There has certainly been an enormous amount of change in banking practices in the last five years, but always with full and comprehensive consultation. All of the banks recognise the need to ensure their systems are robust, as well as compliant. There can be no trade-off between these priorities – the reputational risks are very clear to all concerned."
An IT head at one UK bank, who wished to remain anonymous, said management, shareholders and regulators are turning to IT to put more systems in place which monitor and trap bad behaviour, as well as provide more reporting.
Meeting regulation is just seen as a cost, and banks will do it as quickly and cheaply as possible
Alex Kwiatkowski, IDC
IT regains high-profile role
"I also sense more appreciation and recognition for IT generally, as management and regulators realise that the solution to many of the issues over the last few years could be addressed by IT solutions," he said.
"IT is high-profile again, rather than just buried somewhere in the back office. A few years ago, I remember IT staff used to say they worked for a bank or an investment bank, but these days they prefer to say they 'work in IT’, which is probably a sign they are proud of what they do but not so proud of the industry they work in right now,” he added.
Rik Turner, financial services analyst at Ovum, said the problem with programmes to meet regulations is that many executives have short-term aspirations because they do not see their future where they currently work.
“The people doing it do not expect to be in the job in three years’ time and maybe not in the same company,” he said.
Microgen's Sherriff believes European banks have fallen behind US banks in efficiency because regulators did not give them time to strategically correct failings following the credit crunch of 2007.
“In Europe, the regulators drove the banks to fix things too quickly, whereas in the US, the government gave the banks more time to fix all the issues before putting the regulations in place,” he said.
The US banks are more efficient as a result, and have a lower cost base, with fewer people carrying out manual processes, he added.
Sherriff said European regulators should have given banks years, not months, to enable them to address problems strategically, rather than just help them tick a regulatory box.