03 Apr Asset Management Outsourcing – Regulators Apply the Heat

By: Mark Seaman, Chartered FCSI, Funds Consultant

For most asset managers, the outsourcing of operational activities is now a standard part of their operating model. However outsourcing critical activities such as fund accounting and transfer agency carries additional regulatory risk.

The Financial Conduct Authority (FCA) in the UK, the Central Bank of Ireland and the CSSF in Luxembourg have all warned asset managers that there are shortcomings in both the contingency arrangements for third party failures and the actual oversight of the third parties. They have set out several principles which need to be followed. These include:

• The firm’s senior management always remain responsible for the correct operation of the funds
• Exit strategies and Business Continuity Planning (BCP) need to be drawn up to plan for the failure of a third party
• The firm needs to conduct on-going monitoring and oversight and retain the skills to enable it to do so
• Oversight must be a continuous process. It is not sufficient to have only an initial due diligence process.
• Risk management is essential to successful outsourcing. A firm should identify and understand key risks in their operations and these should drive oversight.
• Data protection of both company and client data must be maintained in the outsourcing arrangement
• Contractual arrangements need to set out in a formal and comprehensive contract

The FCA has highlighted poor practice it found when visiting asset managers:

• Reliance on the perception that an outsource provider is “too big to fail”
• Reliance on taking operations back in-house despite lacking the capacity and ability to do this
• Reliance on a transfer to another provider but with no clear plan on how to achieve this
• No list of exactly what is outsourced
• Inadequate numbers and expertise of staff carrying out oversight
• Defective Service Level Agreements
• Inadequate management information
• No or poorly planned oversight visits
• Deficient risk management

Asset managers across Europe should:

• enhance their contingency plans for the failure of a service provider providing critical activities, taking into account industry-led guiding principles where applicable and
• assess the effectiveness of their oversight arrangements to oversee critical activities outsourced to a service provider, making sure the required expertise is in place

There is no delegation of responsibility!

Mark Seaman will be joining us at EIMF in Cyprus for two essential training workshops relevant to the funds sector. Find out more for each workshop by clicking on the relevant links below.

Fund Operations, Accounting and Oversight Workshop – a Practical Guide | 24-25 April | Nicosia

Introduction to Funds | 26 April | Limassol

Mark Seaman has worked in fund administration in London, Dublin and Luxembourg since 1982, and has occupied senior fund administration positions at Schroders and Friends Provident. For the past twenty years he has worked as a fund administration consultant, advising over 50 UK and international firms. He has set up funds, third parties and fund governance and oversight arrangements for companies such as Barclays Wealth, RBS, Towry, Close and Santander.

Mark has an MA from the University of Cambridge and is a Chartered Fellow of the Chartered Institute for Securities and Investments.