Last December, the Financial Services Authority issued a ‘Dear CEO’ letter, in which the then-director of supervision in the conduct business unit, Clive Adamson said: “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.
“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.”
In response to this, the OWG has established guiding principles relating to outsourcing arrangements across three main areas: oversight; exit planning and standardisation.
The oversight section deals with building a full understanding of the scope and contractual terms of the arrangements in order to effectively manage the third party relationship and conducting a risk-based assessment of outsourcing arrangements to understand the impact on the firm and end client. It will also establish a level of ownership at a senior level for the outsourced activities.
Exit planning refers to the process of transitioning from one outsourcing service provider to another. It will look at how to develop a comprehensive exit plan, consider any oversight by the asset manager's governance framework and carry out a periodic review of any such exit plan.
Standardisation will call for terminology and documentation to adhere to a standard, as well as data interfaces and testing processes by outsourcing providers, which will help with transition management when changing providers.
The OWG comprises over 30 individuals from 24 organisations including the Investment Management Association, various asset managers, outsourcing service providers and will receive support from the ‘big four’ accountancy firms.
“In rallying around this collaborative effort, the OWG members recognise there is little competitive advantage to be gained by tackling the issues individually and this spirit of collaboration has been a hallmark of the OWG’s approach,” a statement from the IMA said.
