11 December 2012

FSA: Review of Outsourcing Arrangements in the Asset Management Sector

The FSA's concern is that if an outsource provider were to face financial distress, UK asset managers would not be able to perform critical and important regulated activities, thereby causing detriment to customers.

The regulator's discussions with firms indicate that there are several types of contingency plans in place within the sector which give rise to concerns:

• Some firms appear to rely on the fact that the outsource service provider is a large financial institution which regulators might look to rescue using public funds. The FSA is concerned that this approach lacks prudence and is inconsistent with the FSA’s policy of allowing such organisations to fail.
• Some firms rely on taking activities back in house. The FSA is concerned that any transfer would take many months and FSA does not believe firms would immediately have the capacity and abilities required.
• Some firms rely on being able to transfer outsourced activities to another provider. The FSA is concerned about the considerable operational challenges inherent in a transfer as well as the probability that this could not be implemented swiftly enough to protect customers if an outsource provider were to fail. A plan to transfer to another provider may not necessarily be a realistic option due to concentration risk in the supply of certain activities.
• Some firms place reliance on being able to exercise “step in” rights but FSA is concerned that in a stressed scenario such rights might prove difficult to enforce and that there could be undue delay and/or operational risks arising which would be to the detriment of the service provided to customers.

The regulator believes it is the responsibility of firms’ Boards to have considered the implications of outsourcing to an external third party supplier having regard to the regulatory requirements that apply.

It recognises that there may be more robust contingency plans other than those set out above of which it is not yet aware; but in all cases it expects firms to have devised adequate contingency plans which are viable, robust and realistic and set out a clearly defined exit strategy in the event of a termination of outsourced activity under any circumstances, including stressed market conditions.

The FSA therefore asks the CEOs of asset managers to review their current contingency plans, taking into account the observations in this letter to ensure compliance with their obligations under SYSC 8.

Full review

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