Financial industry regulators across the world maintain an intricate relationship with the outsourcing industry. In most countries there are strong regulatory frameworks to ensure organisations operating in the finance and insurance industries adhere to a strict code of practice. Outsourcing has the potential to transfer risk, management and compliance to third parties who may not be regulated, and who may operate offshore. How do Financial Services organisations ensure they remain in charge of their own business and meet their regulatory obligations?

Financial services organisations are increasingly using third-party outsourcing, in an attempt to reduce costs and attain strategic aims. Accrording to a report from the BIS Joint Forum Financial Services Outsourcing, financial firms are outsourcing significant parts of their regulated and unregulated activities. These outsourcing arrangements are also becoming increasingly complex.

Outsourcing raises issues related to risk transfer and management, frequently on a cross-border basis. This increased reliance on the outsourcing of activities may impact on the ability of organisations to manage their risks and ensure their compliance with regulatory requirements.

When entering into an outsourcing relationships financial organisations need to manage the associated risks and ensure that regulatory compliance is met by: drawing up clear and comprehensive outsourcing policies, establish risk management programs, ensure the provider has contingency planning in place, and analyse the financial and infrastructure resources of the provider.

In Australia last year with the new National Consumer Credit Protection (NCCP) ACT came into effect. The NCCP replaced a range of state based legislation to protect consumers and ensure those operating in the finance industry adhere to ethical and professional standards. As part of the new legislation, anyone wanting to offer financial services needs to obtain a license or be an appointed representative of someone who has a license.

Australian Accountants are now legally required to obtain a ‘Certificate of RG146 Compliance’ in order to advise their SMSF (Self Managed Superannuation Funds) clients on strategies such as contributions into superannuation, payment of benefits and the purchase of property through SMSF’s.

Accountants need to obtain your Certificate prior to 1 July 2012 or face the prospect of referring their SMSF clients to a financial planner for advice on their SMSF.

It is now illegal to provide such advice without being authorised to do so. This qualification must be attained prior to their application to Australian Securities Investment Commission (ASIC) to becoming an Australian Financial Services License (AFSL) holder or an authorised representative of such a body.

To address the strict regulatory requirements of the financial services industry some interesting and unique outsourcing models have emerged to ensure compliance is met while offering institutions the core benefits of outsourcing.

Unisys has developed a hybrid model of outsourcing to manage its mortgage processing services. For each banking client Unisys creates a subsidiary. This subsidiary manages all the activities governed by the legislation, Unisys provides the infrastructure to enable the relevant systems and processes but the client retains control and responsibility for managing those processes.

On the other hand Unisys maintains a core team that supports non-legislated activity, which can still be offered via a utility or “leveraged” model for all three clients. Rafe Kruger, General Manager, Unisys Business Process Outsourcing, Asia Pacific, comments, “By combining these two approaches – client specific and utility model — we can offer clients a solution that both caters for NCCP legislation but still accesses the cost benefits of a shared utility service.”

Capgemini proposes that by utilizing a third party outsourcing provider financial institutions can better manage their compliance and risk management issues. Roy Stansbury, managing director of Capgemini Financial Services, said recently, “Another key benefit is the access to a wide range of skilled and experienced experts, who can help the bank deal with an ever-increasing level of complexity. Areas such as regulatory compliance, risk mitigation and fraud detection are inter-related and require special tools and often scarce expertise.”

Outsourcing will always be a major aspect of the financial services industry, particularly as the smaller credit and financial institutions such as super funds and credit unions make greater strategic use of outsourcing. But the management of compliance issues and the associated risks will always be challenge in the deals and relationships formed.

Source: The Sauce

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