Financial industry facing up to outsourcing rules

| 21/10/2015 | 1 Comment

CNC Business(CNS Business): Keeping up its focus on improving the way business is conducted in Cayman, the Cayman Islands monetary Authority (CIMA) has laid down guidelines for the financial services industry on how firms may outsource key activities and regulatory functions. By introducing these rules, CIMA is seeking to protect the industry from exposure to greater risks and to protect individual clients of its licensees from potential loss or damage caused by outsourcing failure, breach or termination.

“Key considerations under the Outsourcing Statement of Guidance (SOG) include a risk assessment and the establishment of a risk management framework to monitor each outsourcing arrangement,” said Martin Livingston, longtime partner and now consultant with Maples and Calder. “CIMA expects any deficiencies identified in the framework to be rectified by August 2016.”

Typical functions being outsourced in Cayman include back-office and administrative activities, such as IT operations, accounting and HR, or on the risk management side, such as compliance or audit tasks.

“Nowadays, most functions can be, and are, successfully outsourced for increased efficiency,” Livingston said.  “The material functions that require the most attention when delegated are those related to management oversight by the governing body, for example, the board of directors. The outsourcing SOG highlights that the same level of oversight and accountability should apply, and that responsibility will not be transferred, for any delegated function.”

In many cases, outsourcing creates both significant efficiencies for the licensee and additional work for other Cayman-based service providers. Reinsurance and captive insurance companies, for example, would outsource administration of the vehicle to their insurance manager. Otherwise, unstaffed Category B banks, for example, might be outsourcing their entire operational, risk management and internal control systems to their parent bank, back in their home jurisdiction.

CIMA said it understands the benefits that can be derived from outsourcing, in terms of economies of scale or taking advantage of expertise. Outsourcing can also leverage large scale technology and systems, which would otherwise be unobtainable due to the investment required. As the financial regulator, however, CIMA wants to avoid the problems that would arise from outsourcing failure, which could have far reaching implications.

“Practical issues that could arise from outsourcing include data loss or restricted access to data, regulatory arbitrage, further sub-delegation without notice, or unintentionally triggering mind/management rules,” Livingston said.

Some of the matters CIMA expects to be considered in an assessment of outsourcing arrangements include the impact on a firm’s finances, should the service provider fail to perform over a given period of time, as well as its ability to maintain appropriate internal controls and meet regulatory requirements. Significantly, attention should be given to the risk of potential loss of access to important data and any difficulties involved in finding an alternative service provider or bringing the business activity back in house.

Within the general guidance, which applies to all regulated entities except for investment funds, private trust companies and certain excluded persons, it is notable that CIMA may, on a case-by-case basis, impose additional requirements on a regulated entity, depending on its assessment of any negative consequences.

In terms of what firms affected need to be doing now, Livingston said there are several calls to action, from identifying and recording all material function outsourcings, assessing the risks both now and on a regular basis, plus identifying and rectifying any deficiencies. Amongst other things, terms and conditions for minimum criteria and standards should be reviewed or drafted, along with approval procedures, monitoring programmes and regulatory reporting.

Clear responsibility must be designated in house, most likely to the board, to oversee the conduct of the service provider. Feasible contingency plans are also expected to be in place in the event that the outsourcing fails.

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Category: Finance, Financial Services

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  1. Anonymous says:

    Get ready for an exodus of companies from Cayman in 2016.

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