Outsourcing in Financial ServicesDominic FieldingInfoLink Conference October 2015

The evolving regulatory landscape around outsourcing. Both the FCA & PRA have questions about how effective oversight is working and follows the increasing trend to use external service providers. How will this work in our sector with increasing focus on conduct risk and digital solutions? •The current regulatory perspective, what this means for our businesses•Effective governance is a key theme•Key Principles on managing outsourcing risk, some examples through the relationship lifecycle•A view to the future

Overview

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The current regulatory perspective, what this really means for business

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• Both PRA & FCA, although more focus from FCA • FCA Risk Outlook previously specifically talks to outsourcing and

service quality falling, within section titled “Deep and prolonged cost-cutting strategies without a full understanding of the consequent risks and dependencies”

• 2015 Plan talks to technology and big data, how is risk being managed?

• FCA/PRA sharing a rulebook and both looking at business models, key part of Firm Supervision

• Systematic framework reviews – so where do we create value? A focus on profit centres and is that outsourcing driving the profit?

• In this economic environment, costs are still being cut and outsourcing is front and centre, hence continued scrutiny across EEA

• FCA expect Boards and Execs to be fully conversant with this and their involvement in development is key throughout the outsourcing journey

• Can we expect continued regulatory scrutiny due to political pressure and focus on our industry?

Outsourcing – UK regulatory position

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• Insurers will need to consider how the governance requirements arising from Solvency II will affect their activities, particularly in relation to outsourcing.

• Incoming firms that passport into the UK on a services basis need to be satisfied that they have not established a branch in the UK by virtue of activities outsourced to agents in the UK.

• Where insurers and intermediaries work together on products, they must agree their respective roles and in particular which of them is a "product provider", identifying the responsibilities which flow from that.

• Review their existing monitoring activity and management information to be certain that it is appropriate.

• Assess the appropriateness of existing distribution channels and sales activities and the processes in place to offset risks to consumers posed by the distribution channel.

• Be aware that revisions to the Insurance Mediation Directive (which will become the Insurance Distribution Directive) could include measures relevant to product oversight and governance.

Outsourcing– FCA Thematic in General Insurance

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More regulatory perspectives, Banks & Insurers

• Basel Committee wants to see design and effectiveness of operational risk

• Management throughout the outsourcing lifecycle (in summary):– Procedures and processes for

deciding whether an activity can be outsourced

– Effective oversight for managing and monitoring risks, including financial

– Condition of service provider, control environment

– Contingency Plans– SLAs– Exit plans and business resilience

• Solvency 2– Article 274 contains some high level

requirements that will apply to any outsourcing by an insurer, but many of them will only apply to the outsourcing of "critical or important operation functions or activities" (which replaces the existing concept of "material outsourcing").

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More perspectives, non FS but relevant practice

• Expertise and knowledge from ISO37500

• 7 country delegations actively contributed

• 3-10 experts per country from all sectors and industries, clients, providers and consultancy firms contributed their knowledge and experience

• About additional 13 countries reviewed, challenged and gave feedback to ISO37500

• DIN SPEC 1041– German institute for standards,

specification on – “Outsourcing of technology driven

knowledge-intensive business services”– Experts of all kinds of industries and

organisations in Germany pulled together this standard, published mid 2011.

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How does this regulatory approach help our business?

• Common sense and good business practice codified

• Challenge exists in complexity of numerous OSP arrangements and consistent risk management– Can we consistently demonstrate

good governance– Corporate memory– Cost reduction as a driver? How

does that match quality?– Technology outsourcing growing

where the provider has functionality we lack

• When/if things go wrong…• How to exit safely?

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Commercial tension?

Conduct & Culture?

The industry view with effective governance as a key theme

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Poland to Asia then….?

Outsourcing industry covers ever growing time zones

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PolandHas developed a vibrant outsourcing centre. Employs 150,000 people, half of them in accounting and FS. Warsaw is already thinking what next?

IndiaWell educated young population, over 1 million people in this type of work and growth of 12-20% per annum

PhilippinesAgain, well educated and population with over 750,000 people in this line offering additional scope in time zone

Flexibility“Offshoring is growing and countries have wage cost levels below 20% of the UK” Deloitte

Step back and look in….

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Source – Pwc Governance

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How does our business partner’s risk appetite compare to our own?

How do we prove we have effective oversight?

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Customer Outcomes (NPS) MI and actionable data Relationships of trust Aligned risk appetite

Pension freedoms and our challenges, working with our outsource partners to deliver good customer outcomes.

Key Principles on managing risk, some examples through the relationship lifecycle

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PWC Carried out an independent study to gain insight into notable practices adopted in the management of vendors engaging in high risk activities, across a range of leading organisations

• 6 core sectors – Space; Pharmaceuticals/Chemicals; Nuclear; Construction; Airlines; Mining

• 21 organisations surveyed, over 30 interviews held (original plan was 12)

The scope of study was

• To understand how organisations manage vendors involved in high impact activities• To distil the notable practices from the set of good practices reported by participants• To construct a composite model of excellence based on these notable practices

Key principles that drive OSP management in high risk activities

PwC

Key principles that drive vendor management in high risk activities

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PwC study of 21 companies in 6 sectors identified the following :

Strong monitoring, inspection, compliance and assurance A clear and comprehensive scope of work allows effective monitoring Inspection and compliance performed by skilled individuals, who are placed

within or work alongside the vendor and are experienced enough to step in and perform the work if necessary

Assurance is practical, to the point, informed by experience, and leads to action

Accountability always rests within the client for OSP performance In exchange for the burden of accountability, individuals within the client are

given the right level of authority and autonomy to make decisions Outcomes of decisions are made predictable by a clear and concise hierarchy

of priorities expressed in plain language and a way of working that is known and accepted by all

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Ask yourself, how do these principles apply in our business and how would we prove we actually do them with great examples?

A view to the future

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Where is this all going?

• From a volume and wage game• Cost reduction• Back office focus (tasking)Now moving towards• Medium and small companies

working together to manage middle/back office

• To…..Big data• Data analytics (forward looking)• Cognitive computing – not just

the ‘what’ but the ‘so what’• “Offshoring will be done to

transform the enterprise” Accenture

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Thank you