Business and regulatory pressures will drive investment in IT.
A raft of forthcoming regulations and the need to overhaul ageing back-office systems will drive IT investment in the financial services industry over the next 12 months.
Figures from the Computer Weekly IT Expenditure Report, produced by Kew Associates, show that although IT spending in the financial services sector will grow only marginally from £11.8bn in 2003 to £11.9bn in 2004, spending on computer services is set to grow by 7%.
This will mean that in 2004 financial services firms, led by the general insurance and finance house sectors, will spend £4.5bn on computer services.
The major challenges faced by financial sector IT directors fall into three main areas: using technology to comply with forthcoming regulations such as the Basel 2 code on risk management and international accounting standards; replacing ageing legacy systems; and investing in new technology to improve customer service.
IT investment in the insurance industry will be heavily influenced by a radical overhaul of pensions regulations.
Some experts believe that the UK's largest pension companies could have to pay IT bills of up to £30m each to comply with legislation to simplify pension schemes, forcing some to rethink their priorities.
The Pensions Bill, published last month, aims to make it easier for people to save for their retirement and make company pension schemes easier to manage.
Industry watchers believe the pensions overhaul would require life and pension companies to make sweeping changes to their IT systems, including rewriting policy administration systems to reflect new rules, converting and testing data and, in some cases, buying new software and hardware.
Compliance with pensions legislation will be a priority for Norwich Union over the next twelve months. The insurance giant will also begin to replace its ageing back-office systems, some of which are up to 30 years old.
This will involve replacing 750 mainframe systems. "It is simply uneconomical to try to connect new systems to a range of old systems," said Alex Robinson, IT director of general insurance at Norwich Union.
New IT projects include using software to automate some of the claims processing procedures in parts of the general insurance business, a move that Robinson believes could save the company tens of millions of pounds.
IT projects in the general insurance business of Norwich Union will be split almost evenly between maintaining existing IT systems and new projects.
The need to modernise the infrastructure of financial markets looks set to drive IT investment among finance houses and other services this year.
Firms will also invest heavily in technology to automate the complex trade cycle - a process known as straight-through processing (STP).
London Clearing House is replacing its back-office IT infrastructure with a Java-based architecture in a project worth tens of millions of pounds.
However, an ambitious project to consolidate the IT systems at the heart of Euroclear's multibillion-pound settlement system has been delayed to allow business process harmonisation.
Euroclear, formed in 2002 by the merger of Brussels-based settlement house Euroclear and the Crest settlement service, originally intended to develop a single trade settlement engine by 2005.
The system would give European customers a single service for settling trades and help to cut the cost of cross-border trades by 90%, according to Euroclear. However, it has delayed the planned go-live date for the single settlement engine until 2006.
Meanwhile, the London Stock Exchange has embarked on a series of projects to update its trading technology, which it offers for sale to other exchanges. Its electronic trading service, Sets, will underpin a new trading service for Dutch Equities, which is due to be launched in May. The exchange is developing the technical infrastructure to clear trades for the Dutch market in partnership with Clearnet. It will also be looking to boost its revenue through sales of its Sets trading technology to other exchanges - current customers include the Johannesburg Securities Exchange.
Other major projects include an ongoing upgrade of its hardware to help to ensure that trading platforms can meet trader demand, and further investment in Proquote, a real-time financial information service acquired by the exchange last year.
The London Stock Exchange will also introduce an electronic coding service to help to reduce the amount of failed cross-border trades by automating more of its post-trade processing.
UK banks are also embarking on ambitious projects to modernise their core systems and networks, according to Teresa Jones, senior research analyst at Butler Group.
High street bank Abbey, for instance, is rolling out an internet protocol network across 750 branches as a part of a wider shake-up of its business.
The network, operated by BT Transform, will provide IP telephony and data services across the network to support Abbey's One On One customer relationship management programme, which aims to increase customer retention and improve revenue by boosting the average number of products sold to each customer from two to 3.5.
Abbey has also configured and implemented Siebel's eFinance multichannel customer relationship management system to support internet, telephone and branch-based banking.
Banks, too, will invest heavily in outsourcing. Barclays is due to sign a major deal to outsource its application development division to Accenture within the next month. The contract, which is expected to be worth up to £75m a year, would be one of the largest of its kind in the banking industry.
The application development division of Barclays' IT department, called Build Services, employs 2,000 people and is tasked with helping the bank harness new technology.
How the report was produced
Information on total IT spending is collected annually from more than 60,000 UK IT budget holders on Computer Weekly's circulation list. This is supplemented by more detailed IT spending information from more than 5,500 budget holders surveyed each year.
Additional information is sourced from the Office of National Statistics and the Treasury if needed.
How to buy the report
The Computer Weekly UK IT Expenditure Report, produced by Kew Associates, analyses spending in 66 industry sectors across 21 spend categories, such as software, hardware, services and staffing. Reports cost from £495 to £10,000 depending on the level of detail required. For more information contact Georgina Tucker at Computer Weekly.
Business and regulatory pressures will drive investment in IT.