UK: Bank Fined £1.9 Million As FCA And PRA Focus On Outsourcing Failures

Last Updated: 1 August 2019
Article by Tristan Jonckheer

R. Raphael and Sons plc (Raphaels) has been fined £1.9 million by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for failing to manage its outsourcing arrangements adequately. The FCA and the PRA are currently paying close attention to "operational resilience" in outsourcing arrangements, due to a number of significant technology outages in the financial services sector in recent years. The fine follows the publication of the new EBA Guidelines on Outsourcing earlier this year, which apply from 30 September 2019. This is an issue that financial services firms should pay close attention to, in both new and existing outsourcing arrangements.


Raphaels is a small retail bank offering financial services, including prepaid card and charge card programmes in the UK and Europe. These card services are provided with the assistance of a third party card processor. This third-party processor carries out services that are critical to the operation of the card programme (e.g. authorising and processing card transactions).

The third-party processor suffered an incident on Christmas Eve 2015, following a technology malfunction. The incident had widespread impact, with the third-party not being able to provide authorisation and processing services for more than eight hours. During this period, 3,367 customers were unable to use their prepaid cards and charge cards and, in total, the card processor was unable to authorise 5,356 card transactions at ATM machines, point of sale terminals and online.

The FCA and the PRA noted that the outsourcing agreement between Raphaels and the third party was not fit for purpose. For instance, Raphaels did not have adequate processes in place to understand how its card programmes would be supported on the occurrence of a "disruptive event". The FCA also criticised the inadequate oversight and governance of its outsourcing arrangements.

Mark Steward, FCA Executive Director of Enforcement and Market Oversight, said:

"Raphaels' systems and controls supporting the oversight and governance of its outsourcing arrangements were inadequate and exposed customers to unnecessary and avoidable harm and inconvenience. There is no lower standard for outsourced systems and controls and firms are accountable for failures by outsourcing providers."

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, stated:

"Firms' ability to manage outsourcing of any critical activities is a vital part of maintaining their safety and soundness. Such outsourcing is an important part of a firm's operational resilience, and particularly so in the case of Raphaels given the level of reliance on outsourcing in its business model."

As a result, both regulators found Raphaels had failed to manage its outsourcing arrangements appropriately. They identified a number of contraventions of the financial regulations and found the firm had breached the:

  • FCA Principles for Business 2 (due skill, care and diligence) and 3 (systems and controls) and provisions of Chapter 8 of the FCA's Senior Management Arrangements, Systems and Controls Sourcebook (SYSC 8); and
  • Fundamental Rules 2 (due skill, care and diligence), 5 (effective risk strategies and risk management) and 6 (systems and controls) of the PRA Rulebook.

As a consequence of these failings, Raphaels was fined £775,100 by the FCA and £1,112,152 by the PRA (a combined fine of £1,887,252). Raphaels agreed to resolve its failings and therefore qualified for a 30 per cent reduction in the fines imposed by both regulators. Without this discount, the combined fine imposed by the FCA and the PRA would have been £2,709,574.


The fine reflects an increasing regulatory focus on "operational resilience" in outsourcing. There are four key points to note:

  1. BCDR assessment: Financial services firms must ensure that, if functions that are critical or important are outsourced, thorough due diligence is conducted both prior to engaging the service provider and during the term of the agreement. It is particularly important to assess the adequacy of the service provider's business continuity and disaster recovery (BCDR) arrangements. To minimise the length of outages, the BCDR plan should specify a time period within which systems should be recovered (i.e. include an appropriate recovery point objective (RPO) and recovery time objective (RTO)). The regulators also criticised the inadequate disaster recovery testing processes. This meant that no contingency plans were in place to deal with a major IT incident. Had Raphaels assessed the BCDR arrangements, then it is possible that it would have found them to be inadequate and required changes, or chosen a different service provider. The outage that led to the fine could then have been avoided.
  2. Service level agreements: One of the SYSC 8 requirements is the need to establish methods for assessing the standard of performance of the service provider. Both the FCA and the PRA criticised Raphaels for not having adequate service levels in its agreement. Service levels are important not only for specifying the acceptable performance of the service provider but also for providing a process for regularly and comprehensively monitoring such performance. This is particularly relevant where the firm's own outsourcing policy requires appropriate service levels to be in place, as was the case here.
  3. Governance: Firms cannot fully transfer the responsibility for an IT incident to an outsourced service provider. Firms must appropriately manage the risk of outsourcing through their policies and procedures. It is insufficient for a firm's outsourcing policy to merely recite the regulatory obligations. The policy must provide practical guidance to staff on how to apply these requirements and appropriate training should be provided. It is especially important that financial services firms provide guidance on how to identify critical outsourced services, including how they could be distinguished from non-critical services. In addition, both the Board and Executive Committee of a financial services firm play important roles in managing the risk of an outsourcing agreement. It is critical that these bodies are consulted in relation to specific outsourcing risks and tolerance levels to ensure that appropriate risk controls are in place.
  4. Outsourcing a regulatory priority: "Operational resilience" is a subject that the FCA and the PRA are likely to continue to pay close attention to and outsourcing and technology arrangements will be a key focus area. In its 2018/19 Business Plan, the FCA highlighted "assessing the risks of outsourcing and third-party providers" as one of its priorities. The FCA and the PRA published a discussion paper on "operational resilience" in July 2018 and are expected to publish a consultation paper on this subject later this year. This will provide further guidance on outsourcing agreements. This follows the publication of the EBA Guidelines on Outsourcing in February 2019, which apply from 30 September 2019. This regulatory focus should not dissuade financial firms from outsourcing. Rather, firms should assess the adequacy of their current outsourcing agreements and take the steps required to ensure appropriate policies and procedures are in place in respect of future outsourcing agreements.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions