Following on from the (then) FSA's 'Dear CEO' Letter
of December 2012 on outsourcing arrangements in the asset
management sector and the subsequent meetings that the FCA held
with the industry, the FCA has published a Report (TR13/10)
summarising its thematic work on outsourcing in the asset
management industry involving a sample of 17 asset management
firms, including three hedge fund managers. Although this thematic
review is directed at the asset management sector, it has relevance
to all financial services firms which outsource an activity that is
important for their business. The FCA's thinking on what steps
it considers should be taken by companies in managing the risk of
supplier failure and how outsourcing contracts are to be managed,
is set out.
Asset managers are regarded as engaging in outsourcing if they
appoint a service provider to carry on an activity that the asset
manager would otherwise do itself whilst carrying on its regulated
business.
The FCA's key findings relate to:
- the risk that, if an asset manager's service provider were to fail suddenly and be unable to provide the outsourced services for an indefinite period, the asset manager would not be able to continue to provide services to its customers; and
- the risk of poor outcomes for customers if asset managers fail to oversee their service providers effectively.
The FCA has recommended that asset managers review the effectiveness of their current oversight arrangements and improve them where possible and in particular, enhance their contingency plans for a failure of a service provider.
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