FCA scrutiny over outsourcing could be extended to insurers and pensions
Insurers and even pension funds could potentially face scrutiny from the UK’s Financial Conduct Authority (FCA) over their outsourcing arrangements in a manner not too dissimilar from the thematic review undertaken against asset managers.
Insurers – and to a lesser extent – pension funds outsource significant chunks of their operations to external providers. In 2013, the FCA warned insurers that some were falling short in how they monitored organisations where they had delegated authority for underwriting or claims handling to.
“Given that insurers outsource a huge amount of their operational infrastructure to third parties, there is a strong possibility the FCA may take an interest and demand they ensure they have proper oversight over these organisations. The same could apply to pension funds and their third party administrators,” said Susan Wright, senior adviser for regulation at the Investment Management Association.
The FCA continues to take a growing interest in asset managers’ outsourcing arrangements. In November 2013, the FCA published Report TR13/10, a thematic review following on from its November 2012 “Dear CEO” letter, whereby it expressed concerns that fund managers had given inadequate thought to the complexities and timescales involved in moving service providers in the event of a service provider failure.
While the FCA’s report acknowledged managers had made marked improvements since the “Dear CEO” letter, it warned firms that their outsourcing relationships with global custodians posed serious risks to their businesses, particularly if one or more of those banks ran into difficulty. Nonetheless, managers have been warned the FCA’s scrutiny is likely to go beyond banks and focus increasingly on other service providers such as IT vendors and cloud providers. “The FCA is going to be reviewing resilience risk and oversight practices of fund managers in terms of their service providers,” said George McCutcheon, Director of Research at Financial Risk Solutions.
One way to appease the regulators could be if fund managers have a signed contract with a secondary provider ready and available to port business to should the primary provider default or run into operational difficulties. This has, however, been described as unworkable by some experts.