Banks and insurers that fail to invest in technology should be fined

Earlier this week, it was reported that Royal Bank of Scotland is on the verge of receiving a hefty fine for a failure in its computer systems two years ago - a failure that briefly left millions of customers unable to get their hands on their money. It's absolutely the right response and it's all the more encouraging to hear that the Prudential Regulation Authority has also written to the chairmen of Britain's largest banks reminding them of their obligation to ensure that such failures don't happen in the future.

For the less tech-savvy amongst us - and I include myself in that camp - it may seem harsh to heap multi-million pound penalties on banks simply because their computers broke down. But these kinds of upsets are entirely preventable in this day and age - with most companies having multiple back up servers and various other fall-back support systems when things go wrong. In RBS's case, the failure was in no small part down to its under-investment in its core technology over the past decade. And if you're one of the UK's big four clearing banks - upon which a significant part of the UK economy depends -  that's not acceptable.

Computer says...

But this is not a problem that is limited to the banking sector. Under-investment in computer systems continues to cause millions of pounds of consumer detriment every year. Many banks and insurers are unable to make simple changes to the templates that they use for creating letters or policy documents for their customers. So when a major regulatory change takes place - such as George Osborne's Budget pension reforms - insurers are unable to respond instantly. Many pension companies continued sending outdated information to their customers after this year's Budget, as making significant changes to their communications was far from a simple task.

Hindsight is of course a wonderful thing - and many of these organisations did spend large amounts of money on their systems 20 or 30 years ago, unaware that technology might come on so quickly in the years that followed. Nevertheless, more recently the crucial investment in redeveloping IT systems has too often failed to be prioritised. Given that the sums of money involved are large, companies have kicked the issue into the long grass, committing to overhaul the technology in the long, not the short-run. And it has more often than not been the customer who has lost out.

A strong message

It's for this reason that the regulator needs to send a strong message in the way that it deals with RBS. Companies need to made to see that failure to invest in flexible IT systems is a breach of the regulatory code. It leads to customers being treated unfairly, and it increases the likelihood that customer communications will be wrong or outdated.

Whatever action follows for RBS should be a warning not just for other banks - but for insurers as well. Being technologically fleet of foot is compulsory if you wish to be part of the financial services landscape in 2014. It is not optional.