FCA praises managers on outsourcing improvements
Asset managers have been praised by the UK’s Financial Conduct Authority (FCA) for improving their contingency planning to deal with the failure of a service provider in the regulator’s thematic report on outsourcing.
This comes following the FCA’s “Dear CEO” letter in December 2012 whereby managers were criticised for not having in place adequate procedures to handle a service provider failure. However, there have been marked improvements.
The review highlighted oversight arrangements of service providers varied across managers, although the report pointed out that the majority of shortcomings were mainly caused by a lack of internal expertise to carry out this oversight work.
One area of concern to regulators surrounds the relationships some asset managers have with their custodian banks, particularly around oversight of reconciliations. “We found that where asset managers outsourced reconciliations to a service provider, the asset managers could not always verify that the reconciliations with those custodians were accurate,” read the report.
“A key differentiating factor as to the effectiveness of oversight in this area was the ability of the asset manager to maintain internal client account books from which to accurately reconcile against the custodian’s record,” it added. A lack of oversight, the FCA warned, could lead to trades being omitted from records, non-detection of fraud or losses caused by trade errors.
Overall, vast improvements have been made although the FCA recommended managers review and enhance contingency plans to deal with a service provider failure, adding firms ought to ensure they have sufficient internal expertise to monitor the work of their providers.
The FCA said it will consider a further review on this issue.