Independent Banking Commission - will extra costs for banks' IT and outsourcing be delayed?

As expected, the hotly debated Independent Banking Commission (IBC) final report published on 12 September 2011 recommended that the retail arms of major universal banks should be ringfenced.

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As expected, the hotly debated Independent Banking Commission (IBC) final report published on 12 September 2011 recommended that the retail arms of major universal banks should be ringfenced. The proposal is intended to protect consumers against the adverse effects of a future crisis in the investment arms of these banks.  But the delay in the new regime until the start of 2019 may not avoid extra IT and outsourcing costs for banks in the short term.

The proposed ringfencing would significantly affect the way banks manage their major IT systems and their outsourcing deals. This will force a costly U-turn since international banks have been striving to link up their systems more fully, in order to save cost and clarify their overall risk profile.  While the banks will be keen not to lose the benefits of risk transparency, the new regime may force them to split some of the links across their IT systems and outsourcing deals down the middle, causing extra cost and disruption. As so often, the devil will be in the detail. However, banks will fight hard to avoid having to create mirror systems, in view of the set up and ongoing expense of doing so and the increased regulatory burden.

Although the banks have another 7 years to plan for the ringfencing, some of the extra costs may still be incurred despite the delay.  On any procurement of new systems and outsourcing deals over the next few years, banks would need to look at how the ringfencing could be implemented or face up to the risk of a major restructuring later.  This could add to the cost and complexity of the deals from now on, since the technical design and contractual frameworks will need to allow for a separation in future once the ringfencing requirement is brought in.