Outsourcing by Funds Industry raises concerns at Central Bank of Ireland – wider implications for Brexit?

The Irish regulator is looking more closely at outsourcing, with potential implications for UK firms planning for Brexit.

The Central Bank of Ireland has issued an Industry Letter following up on last year's review on the outsourcing of fund administration.

The review looked at the extent of outsourcing of fund administration and the control environment around it.


Outsourcing is "at or close to its outer limit"

The Central Bank has raised concerns, both for third party and intra-group service providers, over:

  • the levels of outsourcing (at 48-61% of fund administration activity);
  • the number of jurisdictions outsourced to;
  • the oversight and supervision a firm has over its service providers;
  • firms' tolerance for the levels of staff and activities that can be outsourced; and
  • firms' outsourcing records generally.

The Industry Letter contains good practice recommendations for fund administration outsourcings in order to meet regulatory requirements including procurement considerations, internal governance, business continuity, on-going due diligence and audit, retained staff skills and supplier compliance training.

The Central Bank has also noted that the extent of outsourcing of fund administration is "at or close to the outer limit".

In giving consent to future outsourcings the Central Bank will be looking at the cumulative impact of outsourcing on a firm.


What does this mean for UK firms?

UK asset managers will recall that in December 2012 the FSA issued a Dear CEO Letter to the Asset Management Sector. This triggered a thematic review that criticised the lack of adequate continuity and resilience arrangements to deal with a distress scenario or severe operational failure as well as supplier concentration risk.

The industry responded with the Outsourcing Working Group and its response paper. The FCA was supportive but continued to call for asset managers to take action.

Outsourcing remained on the radar in the FCA's Asset Management Market Study. However, in the FCA's Interim Report in November 2016 the regulator seemed more positive about the use of outsourced service providers noting some good procurement practices and asset managers' control of service quality as well as price.

With many asset managers having a pan-European, if not global, operating model, the Central Bank's Industry Letter puts outsourcing and its control environment back on the radar.


Pause for thought

The FSA's Dear CEO letter was aimed at asset managers but rippled across the financial services industry in the UK with a continuing legacy. Ireland is a funds industry hub – but this new Industry Letter could cause similar ripples for the Irish financial services industry as the Central Bank has said it will now move to review financial services outsourcings generally.

Particularly at a time when Brexit reorganisations are at the forefront of minds, could this letter draw scrutiny to an EU-27 head office which substantially outsources its back office operations to a group company in the UK?

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