The Financial Services Authority has fined Bank of Scotland £750,000 for failings in computer systems, controls and staff training which the watchdog says exposed the bank and its customers to loss of money and possible fraud.
The UK regulator says that from November 1999 until August 2001 problems with BoS systems used to administer PEPs and ISAs meant that the bank could not be sure how much money it was holding on behalf of individual customers.
The problems, which have since been rectified, were caused by systemic failings in controls and inadequate staff training, says the FSA.
The bank ran into trouble following the implementation of a new computer system to administer ISAs in April 1999. This system was not fully automated, so staff had to spend considerable amounts of time manually processing items. Despite this BoS transferred 38,000 PEPS onto this new system later in the year. This substantially increased the time that BoS staff had to spend doing manual processing, leaving them with insufficient time to deal with other issues such as items that did not reconcile between different cash accounts.
In June 1999 FSA staff had signalled concern at a backlog of reconciliations in the region of 400. By May 2000 this backlog had reached approximately 10,000. As a result, says the FSA, BoS could not be sure that it knew how much money it held on behalf of individual customers. These problems also resulted in 19,000 material transactions being processed late on customer accounts.
The FSA considered these failings to be particularly serious because BoS had experienced similar reconciliation issues with its previous PEP system, but despite this implemented the new system in such a way as to let old problems re-occur. The watchdog says management failed to ensure that staff were adequately trained to use the new system and remained unaware of the extent of the problems and any operational losses that might ensue. As it transpired, the fall in the stockmarkets reduced compensation pay-outs to customers to just over £10,000.
"In different circumstances the amount could have been much higher," states the FSA.
Andrew Procter, director for enforcement at the FSA says the case demonstrates why regulated firms must have good processes and procedures in place to ensure that funds are adequately administered.
He adds: "In the current difficult climate some firms may be tempted to cut back on investment in back office systems - this would be extremely short-sighted."