The competitive working environment and the need to focus on core activities force today’s financial institutions to outsource some services, critical to their business, for which they have limited expertise and/or limited funds. Outsourcing offers a cost-efficient business by preventing time loss. The Banking Law and the recently-relevant legislation comprise provisions with respect to outsourcing in light of global trends. The Banking Law provides the definition of outsourcing companies (supporting service providers) in Article 3; however it leaves the details of application to the secondary legislation. Regulation regarding the Procurement of Outsourcing Services by Banks and Authorization of the Service Providers (the "Outsourcing Regulation") enacted on 1 November 2006 regulates outsourcing companies and the specifications of outsourced services.
As per the Banking Law and the Outsourcing Regulation, outsourcing companies provide any services supplementary to or complementary of the activities of the banks. However, companies providing clearing, custody and central registration services are excluded from the scope of the definition. The Outsourcing Regulation does not expressly set forth services which may be outsourced upon authorization of the Banking Regulatory and Supervision Agency (the "BRSA") as explained below; but does list the services which may not be outsourced. In this respect, services other than the following may be outsourced to different companies:
- clearing, custody and central registration services;
- services mostly procured from external providers such as consultancy, marketing, security, catering, transportation, promotion of banking services, maintenance and repair of any hardware including ATMs and POS devices, scanning and transfer of banking and credit card application documents to electronic form, delivery of abstracts by hand, and cleaning; which are not supplementary to or complementary of the activities of the banks;
- any activities to be executed exclusively by the Board of Directors (the "Board") or the internal system units.
As per a recent amendment made to the Outsourcing Regulation and published in the Official Gazette dated 24 July 2007, the Outsourcing Regulation provides a non-restrictive list of services such as call centers, maintenance of software services provided for information technologies, ATMs (Automated Teller Machine) and POS (Point of Sale) device operations, imprinting of banking and credit cards, delivery of abstracts in electronic form, archiving and security services comprising counting, distribution, delivery, protection of cash, negotiable instruments and precious metals which can be defined as outsourcing services; however, the providers of such services are not obliged to be authorized by the BRSA. The Outsourcing Regulation does not apply, in whole, to such services; their providers are only subject to limited supervision of the BRSA, are bound by professional secrecy and must purchase professional liability insurance in order to indemnify any losses arising from their activities.
Outsourcing in the banking sector is a highly regulated field. Banks wishing to procure such services are obliged to develop a risk management program defining the services they require, expected benefits therefrom, allocation of audit, evaluation, reporting and security duties regarding such service and a contingency plan in the event such service is interrupted. Prior to the execution of any agreement with outsourcing companies, banks must conduct an evaluation study within such companies as to whether they have the required technical equipment, financial structure, expertise, know-how and personnel for provision of the service. The technical adequacy report to be drawn upon the evaluation study is submitted to the audit committee and to the Board. Upon assessment of the said report and opinion of the audit committee, the Board resolves to execute an agreement with the outsourcing company which it deems adequate.
Article 6 of the Outsourcing Regulation sets forth the required conditions for outsourcing companies, e.g., a transparent corporate structure, sufficient technical expertise and hardware, permits and authorizations necessary for business and professional liability insurance. The said Article also states that the shareholders, members of the Board, auditors and managers must fulfill the requirements sought for the founding shareholders of the banks under Article 8 of the Banking Law.
Companies willing to outsource activities to banks must obtain permission from the BRSA. In an application to be filed with the BRSA, banks submit (i) the risk management program; (ii) technical adequacy report; (iii) the relevant Board resolution; (iv) detailed information regarding the outsourcing companies, corporate structure and backgrounds of Board members, shareholders, auditors and managers; and (v) a notarized copy of the agreement executed with the outsourcing company (a draft agreement may be submitted if the agreement has not yet been executed). In any case, a notarized copy of the executed agreement is to be submitted immediately after execution. The Outsourcing Regulation sets out, in detail, the mandatory content of the agreements to be executed.
The authorization to be granted upon the BRSA’s evaluation of the submitted information and documentation is only valid for the applicant bank. The agreement enters into force upon the delivery of the BRSA’s decision to the relevant parties.
The BRSA assumes a very active role in every phase of the process. If the parties amend the agreement, except for the mandatory content enumerated under the Outsourcing Regulation, they must inform the BRSA of the relevant amendments within seven days. The BRSA itself is entitled to request any amendments if the provisions are not in compliance with the relevant legislation. Where the BRSA detects any activities of the authorized company which are not in compliance with the Banking Law or the Outsourcing Regulation, or if it does not fulfill the necessary conditions enumerated under the Outsourcing Regulation, or if the company fails to purchase professional liability insurance, the BRSA is entitled to request termination of the agreements. Following such request, cancellation of the authorization granted ensues.
Audit of the Outsourced Services
Regulation on the Information Systems Audit to be Carried out by Independent Audit Firms within Banks (the "Information Systems Audit Regulation") enacted on 16 May 2006 and amended by a Regulation published in the Official Gazette dated 17 August 2006, governs the audit of the banks’ information systems and financial data production. As per the Information Systems Audit Regulation, the information system audit is conducted under three categories:
- Audit of application controls (every year);
- Audit of general control areas (every two years);
- A large-scale audit of the above-mentioned areas.
The audit of the information systems of a bank is conducted by its independent audit firm, which is separately authorized by the BRSA to conduct the audit of the information systems (the "Authorized Company"). The BRSA is also entitled to cancel the authorization, on a permanent or temporary basis, if the Authorized Company fails to comply with the provisions of the Information Systems Audit Regulation.
The Authorized Company also audits the outsourced services of banks, taking into account the effect of such services on the information systems and financial data production process. The Authorized Company is entitled to review and evaluate the information systems audit report drawn with respect to the outsourcing company. Where the relevant bank has outsourced some of its services, the Authorized Company provides that the agreement executed with the bank comprises provisions ensuring meetings with the outsourcing companies regarding audit issues.
Despite the fact that the Outsourcing Regulation comprises provisions, even detailed, with respect to the outsourcing, the practice remains ambiguous, as the BRSA has not clarified its approach on the scope of outsourcing. We will see in the near future how the BRSA distinguishes between the core services of banks and those that are complementary and supplementary to such core services.
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.
