NOA Special Interest Group: Outsourcing Works in BFSI
While suppliers and end-users are familiar with the traditional elements of outsourcing within BFSI, new developments in technology and EU regulation have contributed to new obstacles on the horizon that need to be analysed carefully.
The NOA Special Interest Group (SPG) conference on Outsourcing Works in the BFSI was designed to discuss and promote debate regarding the employment of outsourcing within the financial services industry, including regulatory compliance, legislation, current and future developments.
The two speakers were Craig Rattray, partner at Olswang and involved in commercial sourcing, and Philip Allery, Senior Legal Adviser at the Phoenix Group. The two speakers focused on the regulatory requirements currently in place and expected future regulatory requirements including: what are the main restrictions to outsourcing within the BFSI sector? How can these be circumnavigated? How to obtain SYSC 8 compliance in contracts and ensuring data security?
Within the Phoenix group, Philip described how the pension fund consolidator outsources heavily and is involved in the administration of 6.8 million policies, with six major life and pension suppliers including; Capita, Diligenta and HCL. Philip used the analogy of a driving theory test, despite being a driver of longstanding he could still fail the test, being able to do everything, but being unable to say why he was doing it. Long term finance industry businesses can be in a similar position. Old regulation is now becoming heavily outdated and a new regime is now needed. When the guidelines and regulation was created around ten years ago a lot of present day outsourcing methodology did not exit. The landscape has changed and the guidelines and regulation need to be updated.
Philip described of the new regulatory structure, with the Bank of England’s Policy Committee having a dichotomous structure, with the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The PRA carries out micro prudential regulation of around 3000 firms, which are judged as being to systemically important to fail. The FCA on the other hand is the regulator for all business firms and prudential regulator for all non-PRA regulated firms. If you fall into both regulatory regimes, like the Phoenix Group, then you will be faced with varying compliance demands. The PRA and FCA suffer from a lack of effective communication and take different approaches, which can make compliance expensive when one authority enforces a piece of regulation while the other does not.
Philip described how the FSA have now started to move against senior management targeting them over non-compliance, with leanings towards make senior managers personally liable, in a similar manner to that of those within the health and safety sector. The Phoenix Group are predicting increasing investigations into conduct type enquires of how financial businesses are run, and that larger fines can be expected from the new regime with reduced tolerance of repeat offenders.
The SPG then looked at the development of SYSC otherwise known as Senior Management Arrangements, Systems and Controls requirements. The full details of the changing face of SYSC regulation can be found in detail on the event slides 10-13, the speakers focused on the key points surrounding the necessity of safeguards during delegation and overall record accuracy.
The FSA’s Senior Management Arrangements, Systems and Controls requirements:
– outsourcing is an operational risk as a result of potential loss of direct control
– firms that outsource cannot delegate their regulatory responsibility
– firms should take steps to obtain sufficient information from its contractor to enable it to assess the impact of outsourcing on SYSC
Philip pressed that users should be: “trying to understand warning signs earlier on. Triggers, objective measures, and drops in coverage before termination.” He however acknowledged that it can be difficult to gather information in many cases, due to natural competitive needs, saying: “It can be hard to gain information from suppliers, they don’t want to disclose information, including profit margin.”
In summarising the end user’s position, regarding finance regulation, Philip stressed that the FSA wanted a harmonised rule structure, despite it being unlikely that this will ever happen. This is because economic pressures and the recession have changed supplier attitudes, with increasingly large fees being spent on regulation and legal advice and increasing “hesitancy” by users, to outsource.
Craig Rattray of Commercial Sourcing, discussed the hope that increasing requirements from regulation affecting BFSI companies would not restrict business. With SYSC there is an obligation to notify the FSA of major outsourced actions. Users need to factor in how long it takes suppliers to get authorised, especially in a small time frame. If you break up contracts into small agreements then SYSC is less applicable in such contracts. Users and suppliers should be aware that they should be monitoring areas that are not included within regulation.
“We often ask users as to why their asking for regulatory compliance in particular areas, is it commercial or compliance based” said Craig Rattray, adding, “it needs to be rationalised so that rules can be focused”. This has the effect of allowing the supplier to understand and remove needless obstacles that the client has imposed. If clients are able to rationalise checklists with the help of a persuasive argument, they can reduce the cost of procurement through legal fees and obstacle removal.
In an open discussion with attendees, including both end users and suppliers, speakers agreed that it was inherently difficult to try to understand the finical position of suppliers, with successive large organisations having succeeded in hiding major damages and hidden losses. As an addendum to the discussion, all sides suggested that an area for future discussion would focus on how those working in the financial industry should handle information and data storage, with new legislation raising concern and the increasing potential for penalties.
-------------------
For the full write up please click below:
Outsourcingworks_in_BFSI_(2).docx