UK: Practical Guidance On Writing An Outsourcing Policy

Last Updated: 7 July 2015
Article by Amanda Lewis and Nicholas Ralph

Regulatory Requirements

For businesses that operate within the financially regulated sector, there are invariably detailed and often prescriptive rules that apply to outsourcing arrangements. These rules aim to ensure that the firm retains appropriate control or oversight of the activities it outsources, with the ultimate objective of protecting clients (and, in some instances where it is a systemically important institution, contributing to the overall stability of the financial system).

Insurance and reinsurance undertakings are specifically required to have written policies on outsourcing where relevant under Article 49 of Solvency II and must ensure that those policies are implemented. The policies must also be reviewed at least annually, and adapted to reflect any changes in the outsourcing arrangements/operational systems. EIOPA has issued a consultation on the Solvency II governance and own risks and solvency assessment guidelines, which will apply from 1 January 2016 onwards.I

In addition, rules requiring the firm to appropriately monitor and control additional operational risk arising from services or activities performed by third parties are set out in Chapter 8 of the Senior Management, Systems and Controls Sourcebook (SYSC), in the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) Handbooks, and, for insurers, in chapter 13.9 of SYSC. SYSC rules about outsourcing arrangements therefore apply (in slightly different ways) to most regulated firms; for instance, to banks, fund managers, investment firms and insurance companies. Although an outsourcing policy is not specifically in these rules, best practice may dictate that firms have outsourcing policies to comply with them.

Guidance

Some firms struggle with writing Outsourcing Policies and we are frequently asked to advise on this topic. Here is our guidance on writing an Outsourcing Policy.

Scope

The Outsourcing Policy needs to describe its scope. This usually means defining outsourcing. It may also mean explaining that the Outsourcing Policy will be applied, where relevant, to key supplier relationships or material partnerships.

Financial regulation

The Outsourcing Policy needs to be compliant with the specific FCA or PRA outsourcing rules that apply to the relevant firm. It needs to explain how the firm will comply with the relevant outsourcing rules, whilst at the same time being clear and concise.

We generally prefer to include full extracts of all relevant rules in the Outsourcing Policy, as footnotes/endnotes at the end of the Outsourcing Policy, so that people can refer to them when they want to do so. This also helps readers to distinguish between provisions in the Outsourcing Policy that are required by a specific rule and other provisions designed to reflect best practice or the needs of the business.

Practical

The Outsourcing Policy needs to be practical. What we mean by this is that the Outsourcing Policy should focus on setting out the specific actions that the firm intends to comply with, where relevant. For example, instead of saying that the firm will consider the risks involved in outsourcing, it is better for the policy to say that the firm will prepare a risk register and for the Outsourcing Policy to describe:

  • the information to be included in the risk register;
  • how it will be monitored and maintained; and
  • who will approve it.

It may also be useful for the Outsourcing Policy to set out guidance on when it may be appropriate to consider outsourcing.

Accountable

The Outsourcing Policy needs to state, with regard to each action, which function or functions within the firm will be responsible for carrying out the actions referred to e.g. Group Credit will check the financial status of the supplier before the agreement is signed.

Short and concise

The Outsourcing Policy needs to be as short and concise as possible, so that all relevant people within the business will be able to familiarise themselves with it and ensure that they comply with it, where relevant. It is better to have a short Outsourcing Policy that everyone complies with than to have a long Outsourcing Policy that no one or few people comply with.

It helps if each paragraph states who is responsible for carrying out the relevant action, so that people reading the Outsourcing Policy can concentrate on the paragraphs which are particularly relevant to them.
We generally find that a good length is for the main body of the Outsourcing Policy to be under 30 pages. The Outsourcing Policy can then have annexes with:

  • detailed checklists e.g. of due diligence, terms to be included in outsourcing agreements, transition activities, impact assessment activities, exit activities etc.; and
  • model documents e.g. of non-disclosure agreements, business cases, requests for proposals, escalation procedure; and
  • processes e.g. the approvals needed for each action or stage.

Comprehensive

The Outsourcing Policy needs to be comprehensive and include all relevant information that people within the firm need in order to deal with outsourcing projects at four different stages, namely:

  • managing the procurement, preparing for the outsourcing agreement and drafting the outsourcing agreement;
  • ongoing management of the outsourcing agreement after signature;
  • extending the outsourcing agreement; and
  • managing the termination of the outsourcing agreement.

Flexible

The Outsourcing Policy needs to be flexible, so that provisions can be applied where they are necessary and relevant.

Easy to read

The Outsourcing Policy needs to be drafted in plain English so that it is easy to read.

Consistent

The Outsourcing Policy needs to be consistent in its treatment of different issues. For example, it needs to deal with how the firm will:

  • prepare the business case before the agreement is signed;
  • update the business case as part of the ongoing management of the outsourcing agreement after signature; and
  • prepare a business case to justify the early termination of the outsourcing agreement.

Other policies

The Outsourcing Policy needs to include cross references to other relevant polices, e.g. Gifts and Hospitality Policy and Security Policy.

Up-to-date

As the business changes, or arrangements with third parties are altered, so the Outsourcing Policy will need to be reviewed and updated from time to time, so that it maintains its relevance to the business and so that it reflects current regulatory requirements. While the FCA and PRA rules on outsourcing are relatively high level, they are also changed periodically, often in response to new domestic or EU legislation. Similarly, the Solvency II requirements for insurers and reinsurers require that the outsourcing policy is reviewed at least annually. We would therefore recommend that an Outsourcing Policy is reviewed at least annually (as is required for insurers and reinsurers under Solvency II) to ensure it is up to date so far as both the business and regulatory requirements are concerned.

Version control

The Outsourcing Policy should be subject to version control, with details of who has approved it and the next expected review date.

Conclusion

This article provides practical guidance on how to draft an Outsourcing Policy. No doubt, however, much of the guidance will be equally applicable to the drafting of other policies by firms.

Footnote

I EIOPA issued a consultation in December 2014 on guidelines under Solvency II, which address the outsourcing policy requirements. Paragraphs 1.121 details Guideline 68, and paragraphs 2.301-2.304 provide some additional context: https://eiopa.europa.eu/Publications/Consultations/EIOPA-CP-14-017-GL-Governance_ORSA.pdf

" Guideline 68 - Outsourcing written policy
1.121.The undertaking that outsources or considers outsourcing should cover in its policy the undertaking's approach and processes for outsourcing from the inception to the end of the contract. This in particular should include:
a) the criteria for determining whether a function or activity is critical or important;
b) how a service provider of suitable quality is selected and how and how often its performance and results are assessed;
c) the details to be included in the written agreement with the service provider taking into consideration the requirements laid down in the draft implementing measures;
d) business contingency plans, including exit strategies for outsourced critical or important functions or activities.
2.301 On (b), the policy sets out the due diligence process to be carried out prior to deciding on an outsourcing arrangement. The matters to be covered include the financial and technical ability of the service provider and its capacity to perform the outsourcing; its control framework; and any conflict of interests, e.g. between service provider and undertaking or arrangements with competitors.
2.302 On (c), the policy also needs to address the conditions under which sub-outsourcing by a service provider is possible. In any case, if the sub-outsourced function is critical or important for the undertaking the sub-outsourced service needs to be approved by the undertaking.
2.303 The examination of an applicant service provider allows the undertaking to understand the main risks that might arise from the outsourcing, to identify the most suitable strategies for the mitigation or management of these risks and to ensure that the service provider has the ability, capacity and any authorisation required by law to perform the outsourced activities reliably and professionally. The conclusions are to be documented and reviewed by the undertaking at any time it considers relevant.
2.304 On (d), irrespective of the service provider's governance obligation to establish suitable contingency plans for the function outsourced by the undertaking, the undertaking needs to consider in its own contingency planning how, if needed, the outsourced function can be taken over by a new service provider, or bring it back in-house, as appropriate."
For "common platform firms" (i.e. firms subject to the Markets in Financial Instruments Directive 2004/39/EC and/or the Capital Requirements Directive such as banks and investment firms), SYSC 8 applies and requires that:
"a common platform firm must ... when relying on a third party for the performance of operational functions which are critical for the performance of regulated activities, listed activities or ancillary services on a continuous and satisfactory basis, ensure that it takes reasonable steps to avoid undue additional operational risk". SYSC 8.1.9R states: "a common platform firm must ensure that the respective rights and obligations of the firm and of the service provider are clearly allocated and set out in a written agreement".
A related rule in SYSC 4.1.1R requires firms to have effective processes to identify, manage, monitor and report risks and internal control mechanisms.

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 Mondaq.com.

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

Authors
Events from this Firm
21 Sep 2017, Seminar, London, UK

Is there such a thing as "energy law"? What do "energy lawyers" do? And why should it be of interest to anyone else?

28 Sep 2017, Seminar, London, UK

On 26 July the FCA published its long-expected consultation paper on the extension of the SMCR to all FCA-authorised firms. The so-called "core regime" introduces the key concepts of regulator-approved senior managers, firm-approved certification staff and conduct rules applicable to virtually all staff.

3 Oct 2017, Conference, Zurich, Switzerland

As the founding Partner of the Europe-Iran Forum, Dentons Europe will once again support this year’s event. This compelling event which explores all Iran-related topics will take place in Zürich on 3rd and 4th October.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.