Switzerland: Publication Of The Revised FINMA-Circular 2018/3 "Outsourcing – Banks And Insurance Companies"

The Swiss Financial Market Supervisory Authority revised the Circular 2008/7 "Outsourcing banks" ("Cir 2008/7") and published the final draft on 5 December 2017. The revised Circular FINMA-Cir 2018/3 "Outsourcing – banks and insurance companies" ("Circular") applies to banks, securities traders and now also applies to insurance companies. Various suggestions from the consultation procedure were included into the final version. The revised version of the Circular will enter into force on 1 April 2018.

I. KEY ISSUES

The most important changes in comparison to the Circular 2008/7 are:

  • insurance companies are also included in its scope;
  • the revised Circular aims in particular to limit the risks relating to delegation of functions;
  • the term "significant" is defined as an institution specific term and will be determined by the individual institutions;
  • the institutions will be required to maintain an inventory on the outsourced functions, which must be kept up to date;
  • the institutions will be required to create a risk analysis on the outsourced functions prior to entering into an outsourcing agreement;
  • the institutions are required to ensure that itself, its audit company and FINMA are contractually granted a constant, complete and unobstructed right to inspection and audit by the service provider;
  • outsourcing to service providers abroad is only permissible, if the service provider can explicitly ensure that the institution, the audit company of the institution and FINMA will be able to exercise and assert their rights to inspection and audit. In this context, the ability to rehabilitation and restructure a company in Switzerland must be ensured and the required documents relating thereto must be accessible in Switzerland at all times;
  • The Circular no longer contains any data protection provisions.

II. SUBSTANTIAL CHANGES OF THE REVISION

1. Purpose

The purpose article of the revised Circular was amended to read that compliance with the requirements on adequate organisation and now the limitation of the risks relating to delegation of functions will be central (note 1 Circular). By deleting the reference to the requirements on data protection and banking secrecy, a clear distinction between the requirements of supervisory law and other requirements according to criminal, private and data protection law shall be ensured.

In consequence, e.g. the form of the client consent to an outsourcing is no longer regulated in the Circular.

2. Terms

A function is only considered to be "outsourced" within the meaning of the Circular if is a "significant" function. "Significant" means all functions on which compliance with the objectives and rules of financial market supervision legislation depend to a substantial extent (note 4 Circular). With this new terminology of "significant", the principle-based approach and aspect of individual responsibility of the institutions shall be better accounted for: the specification of the term "significant" must be determined on an institutional basis and defined by the institution itself. For this reason, the appendix of the Circular with practice examples to demonstrate which functions are considered to be significant within the meaning of the Circular, was deleted: the institution has now to determine itself, which functions shall be considered significant.

When customer data ("Customer Identifying Data", "CIDs") is outsourced, such an outsourcing is only regarded as significant if the service provider is granted access to mass CIDs (and not just individual CIDs) (page 15 Hearing Report of 21 September 2017).

3. Permissibility

Subject to the provisions of the Circular, the outsourcing of all essential functions is per se permissible.

The outsourcing of operational risk management and compliance functions of banks and securities traders is possible in all supervisory categories. For companies in supervisory categories 1 to 3, the non-operational functions of risk control and compliance cannot be outsourced. For companies in supervisory categories 4 and 5, it is sufficient for a member of the executive management to be appointed for non-operational functions (note 9 Circular), who must ensure that the relevant risks are adequately assessed from the company's perspective.

4. Financial groups / conglomerates

In principle, the Circular also applies to outsourcing within a financial group or financial conglomerate. However, the fact that a function is outsourced within the group can be taken into account with regard to the duties of selection, instruction and control of the service provider and in the content of the contract. For example, the selection procedure of an internal service provider could be less extensive than that of an external service provider (page 28 Consultation Report of 21 September 2017). However, such consideration is only possible if risks typically associated with outsourcing do not exist as far as it can be ascertained or certain requirements are not relevant or otherwise regulated.

5. Inventory of the outsourced functions

The institute has to maintain an inventory of the outsourced functions, which must be kept up to date. The inventory contains at least the description of the outsourced functions, identifies the service provider and the recipient of the function and names the in-house designated body for the supervision and control of the outsourced function (note 14 Circular). Whether a sub-concordant is to be included in the inventory depends on whether its contribution is to be qualified as significant within the meaning of the Circular (page 24 Consultation Report of 21 September 2017).

6. Selection, Instruction and control of the service provider

Institutions are obliged to define and document the objectives and requirements of the service providers pursued by the outsourcing prior to entering into an outsourcing agreement. This also includes the creation of a risk analysis, which includes the essential economic and operational considerations and the associated risks and opportunities (note 16 Circular).

The duties of the institutions and the service provider must be defined and differentiated in the contract, in particular with regard to interfaces and responsibilities. In addition, the material risks associated with outsourcing must be systematically identified, monitored, qualified and managed (note 19 et seq. Circular).

When outsourcing several functions to the same service provider, particular attention must be paid to the concentration risk (note 17 Circular). This is not intended to imply any limitation on the choice of the service provider per se; however, any risks must be taken into account in the evaluation (page 28 Consultation Report of 21 September 2017).

7. Security

As in the previous Circular, institutions are required to enter into contractual security agreements with the service provider for security-relevant outsourcing (in particular in the area of IT) (note 24 et seq. Circular) and to issue a security disposition, which now must cover the continuation of the outsourced functions in case of emergencies. The concrete implementation of the security requirements for security-relevant outsourcing is to be carried out institution-specific and in dependence on the outsourced functions, the specific risks and the systems used (page 30 Consultation Report of 21 September 2017).

8. Audit and supervision

Previously, the institution, its internal auditing department and external auditors, as well as FINMA, had to have full and unrestricted access and audit power over the outsourced divisions at all times (note 40 et seq. Cir 2008/7). Now, the institutions and their audit firms, as well as FINMA, must be in a position to ensure compliance with the supervisory provisions of the service provider, and for this purpose, a contractually agreed full and unhindered right to inspection and to audit in relation to the outsourced function, which is guaranteed at all times, must be granted by the service provider.

Those terms, however, shall be interpreted in a proportionate manner (pages 34-42 of the Consultation Report of 21 September 2017). The term "at all times" is met if test procedures were possible with an adequate lead time. The term "full" relates merely to only supervisory matters. "Unhindered" shall be understood as free access to the documents in connection with the outsourced function by the institution, while preserving the trade secrets of third parties. Similarly, local presence - especially in the IT area - is not absolutely necessary. The rights of inspection can also be exercised remotely.

As before, it is possible to delegate the audit activities to the auditors of the service provider, provided that they have the necessary professional skills. In such a case, the audit company of the institution is now allowed to rely on the results of the audit company of the service provider (note 27 Circular).

9. Delegation to service providers abroad

Outsourcing to foreign countries has previously required explicit proof of audit possibilities. According to the revised Circular, outsourcing to service providers abroad is only permitted if the institution can expressly warrant for the fact that it, its auditing company and FINMA can exercise and enforce their rights of inspection and audit. In addition, the ability to rehabilitation and restructure of a company in Switzerland must be ensured and the required documents relating thereto must be accessible in Switzerland at all times.

10. Transitional provisions

The Circular applies to outsourcing relationships of banks and securities dealers that are completed or altered after 1 April 2018. For outsourcing relationships of banks and securities dealers which already exist on the entry into force of the Circular, a transitional period of five year applies.

11.Specific provision for insurance companies

a. Permissibility of delegation

In principle, it is possible for insurance companies to outsource every function, both within the group and externally, provided that the business plan requirements according to art.4 letter j in conjunction with art. 5 section 2 of the Insurance Supervision Act "VAG" and the other statutory provisions are met and the interests of the insured persons are safeguarded (Art.6 para. 1 VAG).

Outsourcing of direct and reinsurance captives is permissible to a larger extent than for other insurance companies. In particular, the following outsourcing activities are permissible:

  1. Outsourcing the management of direct and reinsurance captives based in Switzerland (including central management functions of the management) to suitably specialised captive management companies;
  2. Outsourcing the management of branch companies of foreign direct insurance captives within the group or to specialised captive management companies. The supervisory function of the Chief Representative must how ever not be restricted by the outsourcing of such functions.

This regulation for insurance captives corresponds to the previous practice of FINMA.

b. Inventory of delegation

For insurance companies, the business plan form J should be adjusted in accordance with the inventory requirement. The business plan form J itself is not the subject of a reporting or licensing obligation (page 24 Consultation Report of 21 September 2017). On the contrary, the elements expressly designated in the business plan form J (highlighted in dark color) are subject to approval.

c. Transitional provisions

There is no actual transitional period for insurance companies, as they were not subject to the Circular so far and, according to FINMA, the Circular largely corresponds to the already established practice for insurance companies. For insurance companies with initial authorisations, the Circular is valid from 1 April2018; for change authorisations, the Circular is valid from the date on which a business plan amendment is submitted to FINMA for approval.

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
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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
Registration (you must 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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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