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UK financial services regulator to link top banker bonuses to IT performance

FCA head tells Commons Treasury committee: “We expect banks’ policies on variable remuneration to reflect operational resilience. They have to – if they don’t, we will act.”

The Financial Conduct Authority (FCA) will reduce the bonuses of bank leaders if IT failures at their banks cause outages for customers.

The announcement follows a huge rise in banking technology failures.

Speaking to the Commons Treasury committee, FCA head Andrew Bailey said banks should link bonuses to operational resilience themselves or the FCA will enforce the measure.

The FCA has identified a worrying increase in IT failures at banks. Bank have massive IT operations and as they move to new technologies, driven by competition and customer demand, IT failures are increasing and causing problems for customers.

Banks are being forced to replace outdated systems because of growing competition from the technology used by challenger banks or other financial services providers and changing customer banking habits, with a mass migration to digital channels. This is often the cause of IT failures at the banks.

A report from the regulator in November revealed that about 600 technology outages were reported to the FCA between October 2017 and September 2018. This was a 138% increase over the previous year, with failed IT changeovers being the main cause.

Bailey told the Treasury committee: “We expect banks’ policies on variable remuneration to reflect operational resilience. They have to – if they don’t, we will act.”

The IT problems at TSB last year was an example of the difficulty traditional banks and financial services firms face with upgrading IT to keep up with customer demand. In April 2018, TSB moved millions of customer accounts from the systems of Lloyds Bank, which had hosted them since TSB was separated from Lloyds, to a new core banking platform from its current owner, Spanish bank Sabadell.

As a result of problems, customers were locked out of their accounts and experienced money disappearing from accounts. Some were even able to see other customers’ accounts. TSB CEO Paul Pester gave up his £1.7m bonus when he stepped down after the disaster.

Read more on banking IT challenges

One senior IT professional in the UK banking sector, who wanted to remain anonymous, said senior management are often to blame for pressuring IT teams into going live with new systems before they are ready.

He said hitting management in the pocket is a good idea. “A lot of the IT problems have been because management pushes IT to go ahead with releases of technology that is not ready,” the IT professional said.

“If the entire bank, and not just IT, is affected by problems by losing money, they will think differently in the future.”

Even small fixes are often done too quickly because of pressure from business teams at banks, he said. “For example, traders will push IT to fix things and, if they are pressured, they might not be done properly and will cause problems later.”

The IT professional added that the FCA has probably realised that management is putting too much pressure on IT, so wants to link punishments to them.

While TSB is the most overt example of IT failure in the sector, there have also been many smaller outages at the UK’s big high-street banks recently. These problems are often related to digital banking services.

For example, in September 2018, Barclays, Royal Bank of Scotland (RBS) and NatWest customers experienced problems accessing mobile and internet banking over a two-day period.

Barclays customers were unable to use the bank’s mobile banking app, and customers of RBS and NatWest – both part of the RBS Group – were unable to use mobile and internet banking services.

Read more on IT for financial services

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Karl, operational resilience does not mean primarily IT.

It means that business functionality realised in the banks should be implemented in a resilient manner. Example: all big banks have their DR plans and resources. Usually, they are engaged in a "cold reserve" manner, i.e. they are not engaged until the disaster happens. A resilient solution means that the bank's DR resource should be used now as a "hot reserve", i.e. should work all the time with a load balancer between both environments. I talk here about business operational activities and processes. If IT  products are used in the business operations, they also have to be made resilient.  Thus, a bank is requested having two isolated implementations of the same process with related resilient IT (also isolated) systems and data storages.

This is not only a new reality for banks, but a case that banks fought against all the time: now banks need to manage two teams for everything having 1.5 or 2 times more managers and staff, as well as paying twice, at least, for the resilient IT resources. 

An additional headache will be with synchronising the bank's DR with the DR of used Cloud Providers, that are not under the FCA regulation. From another hand, banks can chose to "close" own ITs and higher Clouds from different providers while duplicating deployed functionality.
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