FSA tells banks to spend £1bn on IT to speed up compensation payouts to savers

The UK's Financial Services Authority (FSA) has called on the country's banks to spend nearly £1 billion on new IT systems to speed up the process of paying out compensation to savers if they collapse.

The call comes in a consultation paper published by the regulator on strengthening the Financial Services Compensation Scheme (FSCS) - which acts as a safety net for depositors of up to £50,000 if their banks go bust - in the wake of the collapse of several lenders in recent months.

The new IT systems proposed - costing an estimated £891.8 million over five years - are designed to ensure banks can provide a list of all customers' deposits within 48 hours of collapse, enabling the FSCS to ensure customers get compensation within seven days.

This will involve a £438.8 million investment to make sure banks have a single customer view (SCV) for each eligible depositor, pulling together information on their deposits within an authorised entity under a unique identifier. Deposit takers will need to be able to provide an SCV within 48 hours of being notified by the FSA or FSCS, to ensure quick payout to customers.

In addition, the FSA says around £196.5 million is needed for data cleansing, with firms required to ensure the existence, completeness and accuracy of all data for each depositor. Banks that use more than one system will also need to improve the consistency of data fields across them.

Firms will also be required to 'flag' accounts belonging to all depositors who are eligible under the FSCS to allow fast identification of those entitled to a payout. The regulator estimates this will cost the industry £135.2 million.

An FSCS limit check facility, costing around £21.6 million, will enable the systems of firms to automatically identify a particular depositor's compensation entitlement - the actual figure the FSCS will pay out.

Finally, banks need to invest about £99.6 million in an electronic storage and retrieval system, so that once the data has been cleansed, aggregated into a record per eligible depositor and had the limit applied to it, it can be stored and retrieved if it needs to be sent to the FSA or FSCS.

The consultation paper proposes changes should be implemented over 18 months, with the system being live from 31 December 2010.

The FSA says the proposals are not intended to require deposit takers to implement IT systems and it is a choice left to senior management. However, the regulator warns that if a bank chooses not to implement the systems, it needs to have the relevant rules waived - proving they would be unduly burdensome and waiving them would not result in undue risk.

Separately, firms' obligations to tell customers about the FSCS scheme, along with which trade names are covered by a particular authorisation, would have estimated set up costs of £34.6 million and ongoing annual maintenance costs of £4.2 million.

"Our current scheme has worked well in these unprecedented times, compensating hundreds of thousands of savers in a matter of weeks," says Hector Sants, chief executive, FSA.

"But today's consultation paper seeks to learn the lessons from those events to produce an even better system. We recognise that to help underpin confidence in our banking system consumers must feel confident that their money is well protected - regardless of whether they ever have to claim compensation."

Read the FSA consultation paper here.

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Comments: (1)

A Finextra member 26 January, 2009, 11:49

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The FSA’s call for banks to upgrade their IT systems to speed up the payout of compensation if a bank fails is laudable. Yet, shouldn’t much more of the emphasis of discussion and regulation be on what a bank can do to avoid the payout scenario altogether? It is more critical than ever for the industry to realise that risk management can and must permeate all aspects of the customer relationship to avoid these kinds of catastrophes.

Permeating all aspects means that risk assessments must form a part of customer marketing and retention strategies. But this is extremely difficult to achieve in organisations where risk, marketing and service are separated by different processes, platforms, and mindsets. To survive in today’s risk saturated environment, banks have to centralise control over every aspect of their relationship with the customer, both at the gate and in portfolio analysis. Using the latest technology, banks can ensure that every decision made across the enterprise is consistent with corporate and regulatory rules.

As a result, creating a risk-aware organisation - both from a business and customer point of view - is feasible and should be at the top of the agenda for banks in the current climate. During the course of 2008, the benefits of bringing risk to the front-office, where it can become an integral part of the decision about what to do next with a customer, became very clear. So clear, in fact, that companies that do not weave continuous risk assessment into their customer interactions could be considered as short-sighted. If such strategies are integrated throughout the customer relationship, then companies may find themselves in a much better position with their customers and their business if something does go wrong.