What Will Increased Regulation Mean For Outsourcing in the Financial Services Sector?
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.
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“As aptly pointed out matured and experienced service providers of outsourcing services have a distinct advantage here. They are able to cross leverage past experience, provide buyers access to best practices in such implementation which otherwise would be fraught with risks and extensive operational expenses. BFS Industry and Outsourcers can create a realm where the objectives of this new regulation are achieved with minimal issues and in most feasible time frame”
Interesting thoughts, Tony. Proper governance (along with the right vendor) has been shown time and time again to be linked directly to the success of an outsourcing engagement. Despite this, many firms still struggle with the complexity that large outsourcing engagements entail—especially in a multi-sourced situation. MiFID provides an impetus for firms to invest in experienced governance professionals who bring the know-how to instill the tools and processes necessary to manage multiple outsourcing contracts. This provides a solid foundation for a strong governance culture — a win-win for all involved.
From a global sourcing provider’s perspective, MiFID’s directive has the potential to be very beneficial. Risk/Regulatory compliance governance mandates will likely ensure that firms collect better data about their outsourcing engagements. More data leads to more accurate baselines and more realistic contracts, a strong positive for all stakeholders.
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. Outsourcing is a subcontracting process such as product design or manufacturing, to a third-party company. The decision to outsource is often made in the interest of lowering firm or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources. For more details, visit this following websites: softwaredevelopmentoutsourcing(dot)org and services-outsourcing(dot)org
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