Over a year has now passed since the Financial Services Authority (FSA) published its Dear CEO letter on outsourcing in which it concluded that the asset management industry did not have adequate resilience arrangements in place to deal with the possible financial distress or severe operational failure of critical service providers. The FSA was clear that while it considered viable resilience arrangements to be required under current SYSC8 rules, existing resilience strategies had many shortcomings.  

2013 was a year of intense industry discussion on the issue, and was rounded off by the industry's response to the Dear CEO letter in the form of the Outsourcing Working Group's (OWG) December 2013 report. This report, alongside the Financial Conduct Authority's (FCA) issuance of Thematic Report TR13/10 on outsourcing resilience and oversight, marks the end of the 'talking' phase. 

2014: The year for action

A strong call for action was made by the FCA's Outsourcing lead Sarah De Grey Homer at the launch of the OWG report in January 2014. Ms Homer acknowledged the industry discussion that had taken place during 2013; but was clear that asset managers should be taking action now. Ms Homer was careful not to endorse the work of the OWG, but did note that reviewing a firm's arrangements in relation to the 'considerations' identified by the OWG, along with the FCA's Thematic Report, represented "a good starting point".  

The issue of outsourcing resilience remains undeniably complex and challenging.  A particularly difficult issue has become known as the 'weekend scenario':  just what is expected to be in place on the Monday following the failure of a critical service provider. After a year of discussion, this question remains unanswered. Indeed, the FCA considers there to be no one answer to the question, with acceptable 'Monday' arrangements being influenced by each firm's business model, its customer base, its outsourcing arrangements and the resultant risk profile. It is clear, however, that the FCA does not regard this complexity to be a reason for inaction. 

Action, but what action?

The FCA is now expecting firms to go through a process of reviewing outsourcing oversight and resilience arrangements.   

The OWG report provides a helpful point of reference for practitioners when starting to consider key topics including: the maintenance of a strong understanding and records of outsourcing arrangements (Know Your Outsourcing: 'KYO'); risk-based assessment of outsourcing relationships; governance and oversight expectations; and the maintenance and content of exit plans.

A structured approach to fully meeting the FCA's expectations might include: 

  • Reviewing the expectations and guidance contained within SYSC8, Thematic Report TR13/10, and the OWG Report;
  • Benchmarking current outsourcing oversight and resilience strategies;
  • Implementing improvements to the oversight and resilience model, as appropriate; and
  • Clearly articulating and documenting oversight and resilience strategies, and ensuring these are regularly reviewed and approved by the Board.

The FCA has strongly hinted that it will follow up on the industry's progress on the issue. Taking action now should help position any asset manager for further FCA work on the issue. 

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