Outsourcing in Financial Services

Abstract

Financial services businesses throughout the world are increasingly using third parties to carry out activities that the businesses themselves would normally have undertaken. Industry research and surveys by regulators show financial firms outsourcing significant parts of their regulated and unregulated activities. These outsourcing arrangements are also becoming increasingly complex. Outsourcing has the potential to transfer risk, management and compliance to third parties who may not be regulated, and who may operate offshore. In these situations, how can financial service businesses remain confident that they remain in charge of their own business and in control of their business risks? How do they know they are complying with their regulatory responsibilities? How can these businesses demonstrate that they are doing so when regulators ask? To help answer these questions and to guide regulated businesses, the Joint Forum established a working group to develop high-level principles about outsourcing. In this paper, the key issues and risks are spelt out in more detail and principles are put forward that can serve as benchmarks. The principles apply across the banking, insurance and securities sectors, and the international committees involved in each sector1 may build on these principles to offer more specific and focused guidance. Selected international case studies (see Annex A) show why these questions matter. Today outsourcing is increasingly used as a means of both reducing costs and achieving strategic aims. Its potential impact can be seen across many business activities, including information technology (e.g., applications development, programming, and coding), specific operations (e.g., some aspects of finance and accounting, back-office activities & processing, and administration), and contract functions (e.g., call centres). Industry reports and regulatory surveys of industry practice indicate that financial firms are entering into arrangements in which other firms – related firms within a corporate group and third-party service providers – conduct significant parts of the enterprise’s regulated and unregulated activities.2 Activities and functions within an organisation are performed and delivered in diverse ways. An institution might split such functions as product manufacturing, marketing, back-office and distribution within the regulated entity. Where a regulated entity keeps such arrangements in- house, but operates some activities from various locations, this would not be classified as outsourcing. The entity would therefore be expected to provide for any risks posed by this in its regular risk management framework. Joint, T., Basel, F., & Supervision, B. (2005). Outsourcing in Financial Services, (February).