This week we’ve seen a raft of banking reform as mixed as the contents of the Christmas stocking many of us will be peering into in bemusement, in a few short days. That the government took three months to rubber stamp the somewhat limited recommendations of the Independent Commission on Banking (ICB) is disappointing, but the final report of the Joint Committee on the Draft Financial Services Bill, and a paper from the Bank of England (BoE) on macro prudential policy tools all point towards recognition of a key issue that Intellect has been campaigning on for some time.
The focus of reform of the financial system, up until this week’s announcement on the government’s stance on the ICB’s final report, has been on developing the broad reform parameters that will address the failures exposed by the financial crisis. However, with the government’s almost complete advocacy of the ICB’s recommendations we are now entering a new phase in this process. The challenge now lies in actually implementing what is, to all intents and purposes, a massively complex enforced evolution of the way banks operate, deal with their customers and serve the economy. The ICB did not make it easy for itself, the government or the new regulatory authorities which will oversee the proposed reforms, by failing to fully appreciate the operational realities of the financial system and that an appropriate adaption of existing people, processes and technology within banks could have achieved the same result as the reforms that have been announced this week.
The technology industry has long said that a retail banking ring fence is an expensive and complex duplication of effort, with the same end result being achieved by adapting special resolution regimes that are currently being developed, and a complimentary undertaking to improve the risk analytics frameworks within individual banks. Failing banks would be able to do so without significant negative impact upon the economy and by giving the regulators the right tools to be able to identify where risk lies across the system and then act early enough to mitigate the worst effects, you’re reducing the chance of any part of a bank failing at all. Of course the technology industry will play a significant role in implementing a ring fence, but is it necessarily the best option at this point or merely just a political imperative that the government can ill-afford to U-turn on?
A separate report published this week by a Joint Select Committee across both houses of parliament on the Draft Financial Services Bill calls for precisely this – a commitment by regulators to set minimum standards for banks’ risk data so that they can actually do the job they’ve been set. Intellect submitted evidence to the committee to this end and it is gratifying to see policy makers take on board this critical issue and include Intellect’s stance in the final paper in their final report.
Fittingly, this preceded the publication today of a paper by the BoE and the Financial Services Authority (FSA) which seeks views on the proposed tools that the Financial Policy Committee would use to perform its task of monitoring and mitigating risks across the financial system. What can be taken away from both these papers is that there has been a recent, significant shift in attitude amongst policy makers and regulators on the role that substandard risk data played in the 2007/08 crisis, and the necessity to
address this sooner rather than later. This is an issue that Intellect has been campaigning on vigorously over 2011, and has made significant progress thanks to the expertise and commitment of its members. 2012 will be an equally important year in developing the standards that banks data should hit, and we expect to play a full role in this.
However, where there has been progress on this issue, in a similar vein to the announcement on ring fencing, policy on account switching is disappointingly limiting in its outlook – for both consumers, banks and the wider economy. The rubber stamped proposal from the government was a simple account switching and redirection service that takes the average switching time down from 18 days to seven and which can almost certainly be achieved by the September 2013 deadline. However this will merely be a case of banks throwing more resource (predominantly manpower?) at what is a largely inefficient and analogous
process. It will be limiting in its scope and its potential for supplementing the benefits that the wider reform of the financial system will bring tofinancial stability and future prosperity – compared to the alternative. There is the distinct possibility that banks will face regulatory direction in the medium term to implement a system that can additionally facilitate the mass migration of accounts from a failing bank to a healthy bank over a short period of time (the phrase ‘over a weekend’ has been bandied around in the past…) – part of the requirement to develop Special Resolution Regimes across the financial system. Consequently, Intellect has proposed a Central Utility, developed in two phases that will allow for the competitive switching of current accounts by consumers and then the facilitation of mass migration of accounts in the event of a failure of a retail bank. The Central Utility would consist of a central mandate facility, unique identifiers to differentiate individual consumers across the banking system and will be scalable to accommodate the mass migration of up to 30m accounts in a short time frame. Each phase of the Central Utility will be built with the next in mind, so that the ability to expand it to fulfil these dual objectives, is not limited by design. The account switching system backed by the government (which the Payments Council estimates will cost approximately £650-850m to implement) will almost certainly have to be supplemented by a completely separate additional system that can facilitate the mass migration of accounts in the future. This too, will not come cheaply. By implementing one system that can be scaled to
achieve both competitive and mass account switching, it will significantly reduce the overall costs to banks (and thus consumers and the wider economy) in the medium term and will also deliver benefits to banks in the form of reduced compliance costs and a greater ability to identify and mitigate fraudulent activity. Intellect’s proposition can be seen here.
It is important for banks, the public purse and indeed the economy that there is limited duplication of effort and resource in the implementation of reform. There has already been widespread warning from the banking sector that the cost of implementing reform will have a significant bearing on its ability to lend to the economy. It would therefore make sense for the development of this account switching service to be undertaken with this supplementary future requirement into consideration. However, there is no evidence to date that this has been the case.
The technology industry will of course play a full and wide role in implementing much of the reform being put forward across the system over the coming months and years – regardless of how forward looking and advisable it may be. Whilst spending on technology within the financial sector will remain relatively flat over the coming year, what we will see is an increase in expenditure on technology for compliance purposes – a trend that will increase in the years up to 2019.
However, to treat the technology industry as merely facilitators of pre-determined change is itself limiting in terms of the benefits that can be delivered to the financial services industry and the wider economy. Reform can deliver cost benefits for the banks themselves if views are taken from those stakeholders whose business is based around innovation – ie. better risk data = potential
for reduced capital costs for banks; a more forward looking account switching solution = reduction in future compliance costs and savings on costs such as fraud.
Each bank has distinctive operational and budgetary challenges in implementing these reforms. It’s here that there is a significant opportunity for the broader technology industry to play a critically important role – to act as a partner in identifying the full gamut of potential solutions and helping to develop a roadmap of possibilities and challenges. Intellect already undertakes this role
with many government departments through ‘Concept Viability’, to ensure it achieves value for money in the implementation of policy and reform by shining a light on potential solutions from all corners of the technology industry. The banking sector can currently ill-afford to rely solely upon its comfort zone of known suppliers when implementing such costly and disruptive reform.
What is important however, is that the reform of the financial system reflects the best interests of the economy – it is not clear that by implementing the recommendations of the ICB to the letter, that this will necessarily be the case. As we go into 2012, and we start looking at implementation of these reforms, it is important that the ‘technological art of the possible’ is considered at all times in order to ensure that reform is not limited by a lack of appreciation of what the technology industry can bring to the table.