The last year saw the financial services industry obsessing about compliance and this shows no sign of easing up. “It’s definitely the big story of 2005 and it continues as a major expenditure in 2006 as we start to see interest in other regulations such as the Markets in Financial Instruments Directive (MiFID),” says Anders Maehre, senior analyst in financial services technology group at Datamonitor.
MiFID aims to unify financial services across Europe, lowering the costs for banks doing business in other countries.
That is all well and good but the banks will have to invest heavily in IT systems to reach that goal. Research and consultancy firm TowerGroup reckons it will cost a typical medium-sized European broker a painful $22 million to be compliant.
Overall, the UK Financial Services Authority (FSA) estimates MiFID will force the banking industry to stump up $1 billion in IT renewals.
This investment will reap rewards, but the pattern for many compliance projects so far has been to do the minimum required, rather than see it as an opportunity to improve business processes. “That’s fine for meeting regulatory requirements, but you still end up spending lots of money without the business benefits,” says Maehre.
However much or little effort they put into it, financial services companies cannot ignore compliance. A February report by market researcher Freeform Dynamics says that 60 per cent of IT managers from financial services companies believe the demands placed on IT to deal with these compliance issues will ramp up over the next three years.
Last December Gartner predicted an increase of between 10-15 per cent in IT budgets this year, much of which is being directed at compliance. “Projects that were not aligned with compliance and corporate governance were delayed or cancelled, and Sarbanes-Oxley efforts inhibited the purchase of large amounts of software related to building new technologies and deploying new projects,” Frank Caldwell, research vice president at Gartner, said in the report. “However, by the second half of 2005, increased interest in IT solutions to ease the burden of compliance has begun to drive new spending.”
"“Increased interest in IT solutions to ease the burden of compliance has begun to drive new spending”"
Frank Caldwell, research vice president, Gartner
This is certainly something that Maehre has observed too. “There’s a shift away from the straight cost cutting of a few years ago to a relatively balanced approach of following opportunities as well as cost cutting,” he says. “In the last year, the shift has been more aggressive and there are far fewer people cutting expenditure.”
Good news for contractors
In fact, compliance, security and new trading systems have created a surge in demand for IT staff in the financial services arena. According to figures from the Association for Technology Staffing Companies (ATSCo), contractors in the City are pulling in between £50 and £59 per hour, compared to £37 an hour in the public sector and there is talk of top IT workers creaming in £1,000 a day to help companies achieve the technology changes they need.
So, it has been quite a buoyant 12 months for the banking industry, but it is a mature sector and the banks are having to look for new opportunities, particularly new products and geographies to maintain that growth.
On the retail bank side, chip and pin finally joined up with practises elsewhere in Europe. And we are likely to be saddled with it for a long time given the investment needed to launch it, even though other countries are already looking at next generation technology such as biometrics and getting rid of the magnetic strip. Chip and pin has already made a huge impact on reducing fraud. Industry body Apacs estimates that it saved the UK financial services industry £60m last year.
“In terms of insurance, it’s been a slightly mixed bag,” says Maehre. “Generally speaking, they’ve had quite strong results and the UK and Europe have improved profitability quite a lot.” Multi-channel integration and distribution – making sure that all routes to the customer are linked up – is where investment is currently going in the insurance industry.
While banks and insurance companies are investing in new systems, they are still keen to strip costs from their IT infrastructure. According to Accenture, the trend to outsource will continue and financial services organisations will outsource or offshore half their IT development and maintenance within a few years.