Outsourcing working group publishes guidelines
10 December 2013 London
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The Outsourcing Working Group has published outsourcing guidelines for asset managers.
The publication of the guidelines follows research published by the Financial Conduct Authority (FCA) on the amount of oversight practiced with outsourced functions.
The report was published in response to the growing popularity of outsourcing for critical functions in asset management.
One of the findings of the report was that while some asset managers conduct regular checks on the methods used by service providers, others simply accepted the data as supplied without performing any independent verification.
This may fall fowl of the FCA’s requirement as set out in SYSC 811R. Senior management is obligated to take reasonable steps to avoid undue additional operational risk when relying on a third party for the performance of operational functions that are critical for the performance of regulated activities.
In doing this, the report found, asset managers take the risk that that they may not be receiving an accurate picture of the level of service.
The report stated that the group found in its investigations that asset managers were largely unprepared for the failure of a service provider undertaking critical activities.
The report recommended that asset managers should review their own outsourcing arrangements and enhance their contingency plans for the failure of a service provider providing critical activities, and assess the effectiveness of their oversight arrangements to oversee critical activities outsourced to a service provider.
It is noted in the findings that some of the asset managers that the group consulted said they were comfortable with not having a contingency plan in place because their service providers are part of systemically important banking groups that are ‘too big to fail’.
This view was perhaps reinforced by the approach taken by the government following the financial crisis of 2008, but it is inconsistent with the FCA requirements that asset managers adequately manage the risks associated with outsourcing a critical activity.
The working group also found that some asset managers use offshore service providers, which further reduces the level of oversight on third parties.
The group aims to hold an industry briefing to present its findings in early 2014.
The publication of the guidelines follows research published by the Financial Conduct Authority (FCA) on the amount of oversight practiced with outsourced functions.
The report was published in response to the growing popularity of outsourcing for critical functions in asset management.
One of the findings of the report was that while some asset managers conduct regular checks on the methods used by service providers, others simply accepted the data as supplied without performing any independent verification.
This may fall fowl of the FCA’s requirement as set out in SYSC 811R. Senior management is obligated to take reasonable steps to avoid undue additional operational risk when relying on a third party for the performance of operational functions that are critical for the performance of regulated activities.
In doing this, the report found, asset managers take the risk that that they may not be receiving an accurate picture of the level of service.
The report stated that the group found in its investigations that asset managers were largely unprepared for the failure of a service provider undertaking critical activities.
The report recommended that asset managers should review their own outsourcing arrangements and enhance their contingency plans for the failure of a service provider providing critical activities, and assess the effectiveness of their oversight arrangements to oversee critical activities outsourced to a service provider.
It is noted in the findings that some of the asset managers that the group consulted said they were comfortable with not having a contingency plan in place because their service providers are part of systemically important banking groups that are ‘too big to fail’.
This view was perhaps reinforced by the approach taken by the government following the financial crisis of 2008, but it is inconsistent with the FCA requirements that asset managers adequately manage the risks associated with outsourcing a critical activity.
The working group also found that some asset managers use offshore service providers, which further reduces the level of oversight on third parties.
The group aims to hold an industry briefing to present its findings in early 2014.
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