Will BFSI Regulations Stifle Outsourcing Innovation?
Stan Lepeak, Managing Director, EquaTerra Global Research
Tony Rawlinson, Managing Director, Financial Services, Europe and Asia
On March 11, Mark Robinson, EquaTerra’s COO and the two of us hosted our firm’s annual European banking, financial services and insurance (BFSI) executive dinner in London. More than 30 executives from some of the largest European and global BFSI firms attended the event and participated in a roundtable discussion on trends and futures in sourcing (e.g., outsourcing, captives, global sourcing, insourcing) in the BFSI industry.
While the main theme of the event was global sourcing, the discussion quickly gravitated toward more pervasive business issues, challenges and problems in the global BFSI industry. Of particular concern among event participants and their respective firms is how to deal with the increased level of regulatory oversight being foisted on the industry, especially in the U.K., across the European Union and in the U.S. While increased BFSI market regulation is expected given recent traumas, there is concern that new regulations introduced – over and above creating additional overhead and complexity – will focus too much on the causes of the last financial crisis instead of the next one, and will inadvertently stifle future business innovation.
Outsourcing or the use of offshore captives introduces additional layers of complexity into any regulatory compliance program, including ensuring that actual compliance is in place and proving to regulators that adequate compliance policies, processes and procedures are being faithfully executed. And, specifically for outsourcing by U.K. BFSI firms, the bar is further raised through the U.K.’s Financial Services Authority (FSA) implementation of the Markets in Financial Infrastructure Directive (MiFID). Sections of MiFID specifically address BFSI outsourcing in the context of managing outsourcing efforts, operational risk and ensuring regulatory compliance.
The danger with these and other new regulations is that although they are well intentioned, they do not fully account for the reality of how BFSI firms operate today, especially relative to their use of third-party service providers. As was noted by multiple attendees at the EquaTerra dinner, some in-flight sourcing efforts are being slowed or placed on hold as organizations reexamine the effort’s potential impact on the firm’s ability to address regulatory compliance requirements. The merit of some sourcing efforts is being assessed on their impact on compliance efforts, rather than on their overall business value.
While BFSI firms obviously must adhere to compliance requirements, if being compliant replaces being competitive the industry will suffer, especially relative to firms operating globally or regionally in Europe but headquartered or originating in less regulated markets such as the Middle East and parts of Asia like Singapore. Similarly, when the focus of managing an outsourcing effort is over-fixated on ensuring compliance, it detracts from the ability of the buyer and its service provider to drive innovation, which by its nature enables valuable changes outside the norm.
Ultimately, the consensus from the dinner and from EquaTerra’s experiences is that regulations impacting BFSI firms’ sourcing efforts are burdensome but addressable. They will require firms to apply greater rigor to ensure they have irrefutable control of regulated activities performed by their offshore captives or their outsourcing service providers. Certain activities may become out of scope for captives or outsourcing, such as tasks associated with ensuring regulatory oversight that remain internally sourced. Ultimately, if the requirement to ensure adequate BFSI regulatory oversight in outsourcing efforts improves firms’ overall outsourcing governance and management capabilities, it will prove positive for firms and the market. The challenge, however, remains how to address these increasingly stringent regulatory requirements while still leveraging outsourcing to drive innovation and transformation.
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