Contributing Firms:
What is the current status of the Proposed Central Bank Guidance on Outsourcing? What are the various implications for Fund Service Providers and their delegation arrangements?

Derbhil O’Riordan, Partner, Asset Management and Investment Funds, Dillon Eustace: The Central Bank of Ireland (Central Bank)’s consultation paper on outsourcing which contains draft Cross-Industry Guidance on Outsourcing (Draft Guidance) will, once finalised, apply to all financial service providers (FSPs) regulated by the Central Bank. The implications of the Draft Guidance will depend upon the type of FSP in question.
Derbhil O'Riordan
Derbhil O'Riordan

The Central Bank received 21 responses in total to the consultation paper, and though most responses were received from the asset management industry, responses were also received from other interested firms such as technology companies that are interested in outsourcing from an overall EU perspective. The Central Bank has indicated that it will meet with industry to discuss feedback before finalizing the Draft Guidance at a date later to be agreed.

In the meantime, FSPs should be aware that pursuant to the Draft Guidance, the concept of “delegation” and “outsourcing” are not considered by the Central Bank to be different concepts. Hence the requirements set out in the Draft Guidance will apply to both the “delegation” by FSPs of regulated activities as well as the “outsourcing” of unregulated activities.

The Draft Guidance, once finalised, should be complied with in a proportionate manner by FSPs, taking into account the relevant firm’s nature, scale and complexity of its business activities and the degree to which the firm engages in outsourcing.

Certain provisions of the Draft Guidance only apply to the outsourcing of activities or services which have been categorised as ‘critical’ or ‘important’, being functions which are necessary to perform ‘core business lines’ or ‘critical business functions’. FSPs should have a defined and documented methodology for determining whether a service or function is critical or important.

The Board and senior management is ultimately accountable for the effective oversight and management of outsourcing risk within its business. This includes ensuring that there are appropriate structures in place to facilitate comprehensive oversight of the outsourcing universe.

Boards will also need to ensure, inter alia:
• A designated individual, function and/or committee is appointed to ensure that outsourcing arrangements are overseen and reported on appropriately;
• A documented outsourcing strategy is in place;
• Adequate provisions are included in any outsourcing contract which describe the outsourced function, any financial obligations and the requirements which must be satisfied prior to any sub-delegation/sub-outsourcing taking place;
• Regular and comprehensive monitoring of outsourced services/functions are in place; and
• Timely notification to the Central Bank of any planned or material change to ‘critical or important’ outsourcing arrangement.