Financial services companies face "a major technology challenge" if they are to comply with looming regulations, analyst Datamonitor has warned.

The prediction comes as the European Union considers drawing up an EU equivalent of the US Sarbanes-Oxley corporate governance rules to ensure that firms act in the best interests of shareholders.

The vast majority of European financial services institutions "are poorly equipped to deal with compliance requirements at the enterprise level" due to too many paper-based processes, inconsistent management processes, legacy front-office infrastructure and limited data integration, the analyst argues in a new report, Process Excellence in European Financial Services.

"The relevant information and data required for compliance investigations are often held in disparate, multiple systems [many of which are paper-based] which may not necessarily provide a single view of the customer," wrote report author Sian Jones, managing analyst at Datamonitor.

Datamonitor said many financial services companies have invested in technology to address issues like money laundering, but are far from having a business-wide framework to help them comply with regulations.

Jones warned, "A plethora of siloed compliance systems can cause additional pain when an enterprise-wide view is required, as well as significantly raising the total cost of ownership."

Legislation and regulations affecting financial services organisations include Basel II, with a compliance deadline of 2006; International Accounting Standards, which must be in place by 2005; and the US Sarbanes-Oxley Act.

Some UK companies are struggling to comply with the Financial Service Authority (FSA)'s codes of conduct. Jim Fleming, head of regulatory consultancy practice Cstarr, said usually the problems stem from an inability to deal with unforeseen circumstances. He advised firms to set up compliance action groups. "The best practice is to have an enterprise-wide risk management committee with all the prime movers of the business represented," he added.