In its latest ‘Dear CEO’ letter, the watchdog said it has identified growing use of outsourcing when it comes to regulated activities or tasks that are deemed ‘critical or important’.
The FSA also noted that the small group of outsourcers are usually part of “complex” international banking groups which have balance sheet exposure to activities other than the provision of outsourcing activities.
“Our concern is that if an outsource provider were to face financial distress or severe operational disruption, UK asset managers would not be able to perform critical and important regulated activities, thereby causing detriment to customers,” the regulator said.
“Based on our findings so far we are not confident that across the industry, effective recovery and resolution plans are in place for the asset management sector as a whole.”
The letter added that the asset management industry appears to have several types of contingency plans in place for these situations, all over which give rise to concern.
These plans include relying on the fact that service providers are large financial institutions that would be rescued with public funds, planning to take activities back in-house and moving outsourced activities to another provider.
“We recognise that there may be more robust contingency plans other than those set out above of which we are not yet aware,” the letter continued.
“But in all cases we expect 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.”
Asset managers have been asked to review their contingency plans in light of the FSA’s concerns, while the regulator intends to host an industry event in early 2013 to examine the issue.
