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£30m IT Project Helped Drag Dunfermline Down

Questions are being asked about the degree to which a costly IT project contributed to the decision to effectively nationalise and then sell Scotland’s largest building society

Scotland’s largest building society, sold today to Nationwide, is reported to have lost £31 million in setting up an expensive IT subsidiary to outsource mortgage activity at other financial institutions. The subsidiary, Dunfermline Solutions, added to the company’s financial woes.

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It was announced today that the Nationwide building society is to acquire Dunfermline Building Society’s branches, good loans and deposits. But the buy-out is being underwritten by the UK treasury with the state taking on an additional £1bn of mortgage debt and commercial property lending.

Dunfermline’s failure was blamed on “reckless decisions” by Britain’s Scottish Secretary Jim Murphy. Along with investments in the commercial property market, these decisions included the launch of IT services company Dunfermline Solutions – a move which one manager described at the time as a “rollercoaster ride”.

The UK government used new powers under the Banking Act to push through the partial nationalisation and purchase by Nationwide. Yorkshire Building Society and HSBC were also competing to buy out Dunfermline.

In a statement the Treasury confirmed that it did not feel that Dunfermline was a viable enough business to warrant a full government bailout.

“When considering the appropriate action to take, the Treasury took account of the scale of future losses faced by the society, the additional capital that would be required, and its very limited capacity to service new capital given its historically low level of profitability,” the Treasury stated. “It concluded that an injection of funds by the taxpayer would not be likely to provide value for money and would not provide a sustainable and lasting solution to the problems faced by the society.”

Dunfermline’s collapse was a result of the wider banking crisis, but building societies have been supposed to be more secure and Scotland’s largest building society succumbed because of risks it took on, including setting up the IT subsidiary – a move which may have cost Dunfermline around £31m.

According to reports, the setting up of a Dunfermline Solutions could have contributed to the building society’s losses. “Dunfermline Solutions made a £5m loss (£7.9m before a tax credit) and was left with assets of £20.7m and a deficit of £10.7m – after swallowing up £31.4m to date from the Dunfermline Building Society,” according to the The Herald Newspaper.

Dunfermline Solutions mortgage IT system was developed in cooperation with banking software company Temenos, over a period of at least five years. In a case study on Temenos’ website, Stewart Cooper, director of operations for Dunfermline discussed how the building society was using Temenos’ Globus application to develop its own mortgage IT system that would be distributed via Dunfermline Solutions.

“‘The impact of the new system will reach beyond the Dunfermline too, as we have set up a subsidiary company, Dunfermline Solutions, to enable us to offer the product on an outsource basis,” said Cooper. “There is clearly nothing in the UK marketplace that can match the system and there is a clear opportunity to offer the product and to provide administration of back office services. a ‘new’ company!”

However Cooper did admit the setting up of the new business and choosing Temenos – which was relatively unknown in the UK mortgage market – had risks. ” We have a major project that covers system and organisational change and a ‘new’ company! At times this has been a roller-coaster ride, but we identified the risks and we managed them and I don’t regret it in any way.”

Cooper added: ‘In the end, we selected Temenos, despite its lack of users in the building society market. Was this a risky decision? We accepted that the selection of any software partner incurs risks. Additionally, we were concerned about the lack of local market knowledge and potential implementation risks, combined with the prospect of being the only UK customer in this market.”

As well as the building society’s senior management, responsibility for the creation of Dunfermline Solutions may also have fallen to the company’s IT Advisory Group, details of which were listed in the building society’s 2007 annual report. “The IT Advisory Group’s role it so advise on development of IT strategy, review progress on major technological projects and advise on the approach to working with and selecting IT partners.”

It is not clear what the future of the Dunfermline Solutions will be given the government-backed Nationwide buyout.

Several other larger building societies have developed their own IT mortgage systems but it is usual for smaller organisations to buy off the shelf mortgage systems.