04 December 2013

FCA thematic review of outsourcing in asset management industry


Harvey Knight

Partner | UK

Following on from the (then) FSA’s ‘Dear CEO’ Letter of December 2012 on outsourcing arrangements in the asset management sector and the subsequent meetings that the FCA held with the industry, the FCA has published a Report (TR13/10) summarising its thematic work on outsourcing in the asset management industry involving a sample of 17 asset management firms, including three hedge fund managers. Although this thematic review is directed at the asset management sector, it has relevance to all financial services firms which outsource an activity that is important for their business. The FCA’s thinking on what steps it considers should be taken by companies in managing the risk of supplier failure and how outsourcing contracts are to be managed, is set out.

Asset managers are regarded as engaging in outsourcing if they appoint a service provider to carry on an activity that the asset manager would otherwise do itself whilst carrying on its regulated business.

The FCA’s key findings relate to:

  • the risk that, if an asset manager’s service provider were to fail suddenly and be unable to provide the outsourced services for an indefinite period, the asset manager would not be able to continue to provide services to its customers; and
  • the risk of poor outcomes for customers if asset managers fail to oversee their service providers effectively.

The FCA has recommended that asset managers review the effectiveness of their current oversight arrangements and improve them where possible and in particular, enhance their contingency plans for a failure of a service provider.
 

Category: Article