UK banks urged to invest in IT to prevent failures

LONDON — Britain's banks need to dedicate far greater resources towards securing their IT infrastructure and should have a designated board member overseeing the issue, a senior lawmaker said, following a string of high-profile technology failures.

Andrew Tyrie, chairman of parliament's Treasury committee, also suggested that Andrew Bailey, the deputy governor of the Bank of England (BoE) who heads its banks supervisory arm, should be tasked with ensuring the banks develop more resilience.

Britain's retail banks have been hit by a number of technology failures in recent years, causing inconvenience for hundreds of thousands of customers and prompting lawmakers to call for more investment in financial technology.

"Every few months we have yet another IT failure at a major bank," Tyrie said in a statement on Sunday. "These IT blunders and weaknesses are exposing millions of people to uncertainty, disruption and sometimes distress. Businesses suffer, too. We can't carry on like this."

Tyrie said someone, probably Bailey, the head of the BoE's Prudential Regulation Authority (PRA) supervisory arm, needed to take "a leadership role" over an issue that poses systemic risk to the banking system.

"Currently, no one group seems to be directly responsible for developing a full understanding of the risks carried," Tyrie said in a letter to Bailey dated January 22 and published by the committee.

"A group of this type should now be formed with the primary task of ensuring that the banks develop more robust resilience to protect banking and payment systems. The head of the PRA may be best suited for the leadership role," he added.

HSBC suffered an online and mobile banking blackout in January while in 2015 thousands of Britons failed to receive their wages when some HSBC business customers were blocked from making payments.

State-backed Royal Bank of Scotland (RBS) has promised to invest hundreds of millions of pounds in its computer systems after a series of high-profile glitches. Some customers at Barclays have also endured problems.

Earlier this month, eleven major banks, including Barclays, UBS and HSBC, said they had tested a system that could make trading much faster and cheaper, using the technology that underpins crypto-currency bitcoin.

The banks are part of a consortium of 42 major lenders, brought together last year by New York-based software company R3 to work on ways blockchain technology could be used in financial markets — the first time so many have collaborated on using such systems.

A blockchain is a huge, decentralised ledger of every bitcoin transaction, verified and shared by a global computer network, that can also be used to secure and validate any exchange of data, including real assets, such as commodities or currencies.

Banks reckon the technology could save them money by cutting out middlemen and making their operations more transparent. But analysts caution it is early days — bitcoin was invented just six years ago and blockchain experiments are still under way.

For this test, R3 used a Microsoft platform, which runs on a blockchain built by Ethereum, a non-profit organisation.

The 11 banks in the simulation, operating across four continents, each used their own computer, or "node", and transferred "Ether" to each other — Ethereum's equivalent of bitcoin, R3 said.

They were able to settle the transactions almost instantaneously, it added. That compares to settlement times of days or even weeks, depending on the asset class, under the current systems used by banks.

R3 Managing Director Charley Cooper said the technology could be used by banks to transfer real assets within the next one or two years.

"Rather than just talking about what we might do, we've moved into a new phase, which is actually executing these plans and demonstrating how this technology might work in practice," said Tim Grant, who runs R3's test labs.

Peer-to-peer

The other eight banks involved in the experiment were BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, Natixis, Royal Bank of Scotland, TD Bank, UniCredit and Wells Fargo - all members of the R3 consortium.

"Proving the scale and peer-to-peer operation of blockchain experiments is an important next step," said UBS' senior innovation manager Alex Batlin, who is in charge of a blockchain lab for the bank in London.

R3 has recruited many heavyweights from the worlds of bitcoin and technology more broadly. Mike Hearn, a former lead bitcoin developer who last week said the crypto-currency had been a failed experiment, is its lead platform engineer.

Banks see potential in the so-called "smart contracts" that blockchain technology facilitates: agreements that are automatically executed when pre-determined conditions are met.

"Though... there are still many implementation hurdles left to overcome, this exercise further validates the utility of smart contract consensus technology," a spokesman for Ethereum said.

Separately, entrepreneurs who want to open a bank in Britain can call a new helpline to chat about how much capital they need, and get invitations to rub shoulders with supervisors.

The Financial Conduct Authority and the PRA said this month they had opened a New Bank Start-up Unit to give information and support to newly-authorised banks and people thinking of setting up a bank.

The government is keen for new banks to enter a market where consumer banking is dominated by a handful of lenders such as HSBC, Barclays, Lloyds, RBS and Santander UK.

Regulators have already made changes, such as easing the initial capital burden and fast-tracking approval of a new bank's top officials, leading to 12 new lenders authorised since 2013 with more in the pipeline.

"With the launch of the New Bank Start-up Unit, applicants will now benefit from having a single place where they can get the advice and guidance they need to start a new bank and support once they are authorised," Bailey, said in a statement.

New banks will benefit from access to a helpline, meetings with supervisors, regulator capital reviews, monthly updates by email, and invitations to seminars on regulatory topics.

Elsewhere, the BoE has proposed a new rule for recovering bonuses of rule-busting bankers who have moved to a new employer.

Britain already has among the world's toughest rules on banker pay, introduced amid public anger over lenders being bailed out by taxpayers in the financial crisis and bankers pocketing big payouts at a time of austerity for most people.

These rules allow for a bonus to be cut, stopped or clawed back.

But regulators said this month they wanted to go further to crack down on so-called "rolling bad apples" or bankers who pocket a bonus and then join another lender before any reckless behaviour is uncovered.

"Individuals should be held accountable for their actions and not be able to actively evade the consequences of their actions," Bailey said in a statement.

"Today's proposals seek to ensure that individuals are not rewarded for bad practice or wrongdoing and should help to encourage a culture within firms where reward better reflects the risks being taken," he added.

The proposed new rule targets buyouts, or when a bank compensates new employees for unpaid bonuses that were cancelled when they left their old bank.

Regulators say that undermines the ability to claw back a bonus which has been paid or withhold or cut the unpaid portion of a bonus, when misconduct is later discovered.

The proposed rule states an employee's new contract would allow for a bonus to be recovered or not paid should the person's former employer determine guilt in misconduct or risk management failings.

"The proposed rules would also allow new employers to apply for a waiver if they believe the determination was manifestly unfair or unreasonable," the BoE said.

The proposals, put out to public consultation, would make it impossible for a banker to wipe the slate clean by changing jobs, said Alexandra Beidas, an employment lawyer at Linklaters.

"It remains to be seen if this will be workable in practice as it will involve sharing potentially sensitive information between banks," Beidas said.

Last year, the BoE said it would stop short of actually banning buyouts as it would most likely lead to a competitive disadvantage for British firms given there is no similar rule in other financial centres around the world.