The UK's financial services sector needs urgent investment in its IT infrastructure in order to identify and mitigate systemic risks, according to a report by the trade association for the UK technology sector, Intellect.
In its Biting the bullet report, Intellect said that banks' IT infrastructure is no longer fit for purpose, citing the 2008 banking crisis and recent systems failures by UK retail banks as weaknesses of the financial system that need to be rectified.
Independent analysts JWG Group stated that "decades of ad hoc technology investment, combined with merger and acquisition activity has left [many financial institutions] with disconnected silos of information and duplicative processes".
Intellect said that this was a cause for concern for two reasons: "Firstly, it inhibits the ability of banks to have a holistic real-time view of their own operations and financial exposures. Secondly, it makes it impossible for regulators to build a macro view of the financial system as a whole that allows them to identify and mitigate systemic risks."
The report said that nearly 90 per cent of technology budgets in US and European financial institutions is spent on managing and maintaining legacy systems, which left only 10 per cent for innovation and programme development.
Ad hoc technology investment was an "obstacle to the operation of effective financial regulation", Intellect said, preventing regulators from doing their job and in turn threatening financial stability.
The report claimed that the financial sector has under-invested in those parts of the infrastructure that may not have an immediate return on investment, which has meant that mundane but fundamental areas of financial infrastructure had been neglected.
It also said that banks have "too much data and not enough intelligence", arguing that investment in customer relationship management (CRM) tools is a step in the right direction, but advising banks that to fully understand their customers they need to re-develop their core infrastructure.
The report predicts that new players such as Tesco Bank and the growth of Co-operative Bank and Nationwide Building Society will pose a threat to established banks' market share. According to the report, these players will "not be burdened with legacy systems and entrenched in information silos and will find that they are at an advantage to established banks".
As part of its recommendations to reform IT infrastructure, the report suggested the creation of a "system of systems": "An industry utility should be created through which data from banks would flow to the regulatory authorities, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority, and at a regulatory level, would ensure that this data could then be analysed by the PRA and ultimately be converted into actionable information for the Financial Policy Committee," it said.
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A discussion of the "risk perception gap", its implications and how it can be closed