Flurry of new accounting rules set to keep financial sector IT directors on their toes

Financial services New regulations mean new challenges for IT departments

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.

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