The financial sector is underpinned by infrastructure and IT systems that are 'no longer fit for purpose', according to a new report by IT industry association Intellect.
Entitled 'Biting the bullet', the report says that the 2008 banking crisis and failures in the retail banking sector demonstrate the weakness of the overall financial system, which is the result of decades of ad-hoc technology investment combined with merger and acquisition activity that has created silos of information and duplicate processes.
A recent example saw millions of RBS customers not able to gain access to funds in their bank accounts after a botched upgrade that was made to batch processing software CA 7 from CA Technologies, which impacted some accounts for more than a month. The IT failure has cost the bank a minimum of £125 million.
The report says: "Poor quality financial infrastructure makes it impossible for regulatory authorities to build a macro view of the whole financial system that would enable them to identify and mitigate risk.
"Given the widely-recognised and urgent need to strengthen financial regulation, this is a real problem."
Intellect believes that financial infrastructure is fragmented, which inhibits the ability of banks to draw accurate data from across their operations. This results in regulators not receiving critical information in suitable time frames, and even when it is made available, there isn't a high level of confidence that it accurately reflects the full exposures and positions of individual firms and the financial system as a whole.
"Fundamentally, global efforts to standardise data across the financial system in order to increase its transparency, will be undermined if the poor state of the financial system's infrastructure is not addressed and the regulatory authorities are not empowered with the right tools to fulfil their duties," said Intellect.
The report also argues that this poor infrastructure restricts the ability of banks to share information across their disparate departments and operations, which in turn inhibits their ability to fully understand their customers.
This inadequate infrastructure is the direct result of the banks' reluctance to invest in areas that do not create an immediate return on investment (ROI). Cash is being spent on products and services that yield a short-term return on investment, such as systems to support algorithmic and high frequency trading, rather than core legacy systems.
The report reads: "Unlike other industries where technological capability is a key competitive differentiator and a foundation for better, more customer-centric service delivery, the financial services industry has often treated large parts of its infrastructure as an afterthought.
"As a result, the infrastructure underpinning the banks has become unfit for purpose over the years. Infrastructure and core systems have been upgraded on a patchwork basis rendering them even more complex - and therefore more prone to failure - as systems changes are perennially bolted on to what is already there, rather than replaced by more modern core systems that are better suited to the provision of modern banking services."
Intellect recommended that to ensure change is implemented, the Financial Policy Committee needs to understand and set out what capabilities, such as data quality, dashboards and predictive analytics, it will require in the future for it to perform its financial stability role. This will help set minimum infrastructure standards for banks, as they will be required to meet certain regulatory standards.
It also suggested that an 'industry utility' should be created through which data from banks would flow to the regulatory authorities. It uses faster payments as an example of where the industry has worked together to create a utility that has delivered benefits to customers, banks and the wider economy.
Finally, it called for individual institutions to address their legacy systems and make a commitment to ensure that their infrastructure is fit for purpose and upgraded to minimum standards set by regulatory authorities.