Banks' IT departments on red alert

A government-commissioned report which has recommended that major banks should separate their retail operations from higher-risk activities will result in banks having to rethink IT strategies.

IT initiatives supporting shared services and risk management will require overhauls if the recommendations become regulations.

The Independent Banking Commission's (IBC) interim report calls for UK banks to ring-fence retail banking operations to protect consumers from potential problems emanating from high-risk investment units. The report is in its consultation phase.

The retail operations of UK banks suffered when investment divisions ran into trouble during the recent financial crisis. The government is determined to avoid a repeat. The IBC report recommends that retail operations be ring-fenced from investment and wholesale banking operations.

Changes to IT systems and outsourcing deals

John Worthy, technology partner at law firm Field Fisher Waterhouse, says the changes could have a significant impact on IT systems and outsourcing deals. "Banks currently have many outsourcing agreements across the divisions. This will include things like desktop services. But under the recommendations the different parts of the bank will need separate relationships," he said.

He says there will be increased cost and complexity in the short-term because banks will have to work out where to draw the lines in the business and separate systems and outsourcing deals, and different parts of the banks will have to procure systems separately, which will be more expensive.

There will be a hiatus for months while the proposals go through the consultation phase, according to Bob McDowell at Aite. "In the meantime, they have to develop some firm plans or shadow plans in the businesses where this is going to happen."

McDowell, who believes there should be "an iron curtain and not a Chinese wall" between retail and wholesale/investment operations, says the IT departments in retail bank divisions will have less complicated and less expensive risk management investments to make than their wholesale and investment bank counterparts. "Risk management should become more self-contained and less complex for retail banks."

He adds that banks will have to have separate risk management governance when the new rules come in. This will be split between retail, investment and wholesale, as well as group-wide risk management governance.

Worthy at Field Fisher Waterhouse agrees. "They might already have risk management systems in place that deal separately with different parts of the bank but there will have to be different governance models."

Sharing systems across different parts of banks is common, but this might not be possible under the report proposals, says Worthy. "If there are problems at the investment bank they have to be able to isolate the retail bank."

James Martin, former COO Europe at Lehman Brothers, has worked in both retail and investment banking. He does not think it will be that big an issue for IT departments. "It will not be that difficult because most systems used are different." But he says that if infrastructure has to be separated there will be bigger challenges.

Disruption to services

IT industry body Intellect says the use of shared services across banks might need to be dismantled if retail banking activities are to be ring-fenced. "The greater the cost and complexity of ring-fencing operations, the longer such changes will take and the more potential there is for disruption to everyday banking services," says Intellect.

Intellect will be undertaking its own review of the technology and systems affect upon banks of ring-fencing its retail operations and will submit its findings to the Commission.

Ben Wilson, who heads up Intellect's financial services programme, says because the report suggests ring-fencing retail banks rather than full separation it will not be as harsh as it could have been. "It would have been difficult to separate banks because their services are built on shared legacy systems."

But he believes current systems used to collect data and assess risks will have to be adapted to look at different divisions separately.

David Sherriff, director of banking system maker Microgen, says banks need to get control of their accounting systems. "It is all about financial control and being able to get sufficient visibility of accounting across all lines of business in the bank. He says this need not be too difficult because there are systems available that can separate the accounting of different bank divisions and identify any overlap. They can also prove to regulators that there is no overlap.

The past few years have put banking operations in the spotlight and even Joe Bloggs knows a thing or two about high-risk banking. What is also true, but perhaps less obvious, is the critical role that IT plays in underpinning banking operations. Any major regulatory change will put bank IT departments on red alert.

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