Tony Rawlinson, Managing Director, Financial Services Advisory (Europe & Asia Pacific)
Outsourcing is becoming more and more mission critical for many financial institutions and increasingly important core processes as well as commodity services are being externalised to partners. Given the legacy of the credit crunch and the renewed emphasis on controls and accountability it’s not a big surprise that the regulators are having a closer look at how deals are being transacted and managed.
The FSA’s rules on implementing the MiFID (Markets in Financial Instruments Directive) requirements for banking and financial services outsourcing are wide-ranging and certainly raise the bar. Areas such as due diligence and assessment of provider capabilities, risk management and controls, performance metrics and monitoring and key contract terms enabling business continuity and the return of services in house are now under much more scrutiny than before. However, most if not all of these provisions have been around a long time and are already accepted best practices which have been complied with by most firms, and many institutions are now quite mature at executing the transactional aspects of outsourcing.
Conversely it is in the governance space that some firms continue to struggle, with both supply and demand management processes not always working effectively. In a recent EquaTerra survey of buy side perceptions on outsourcing satisfaction, around a third of firms judged their own governance capabilities as either weak or average. In part this is due to ineffective governance design and accountabilities, but mainly it is attributable to inadequate processes, tools and capabilities which allow part of the value of outsourcing deals to leak away.
The FSA rules mean that for a material outsourcing there is an increased onus on supervising service providers from a risk and regulatory perspective. Firms must retain individuals with adequate governance experience, supplemented by training and development so that outsourcing relationships can be managed with due skill and care and diligence by a retained function with the necessary expertise.
It will be interesting to see whether the regulatory environment will result in more firms addressing previous weaknesses in governance or alternatively whether it will just add overhead. On balance the signs are good and we can but hope that pressures on institutions from both continuing economic uncertainty and stronger regulation will act as a catalyst for the achievement of improved sourcing management in the Financial Services sector.