The MiFID-driven FSA outsourcing rules, which will operate from 1 November 2007 are in Chapter 8 of the FSA's Senior Management Arrangements, Systems and Controls (SYSC) sourcebook.

The rules include that a common platform firm (a firm subject to MiFID and/or the Capital Requirements Directive) must, when relying on a third party for the performance of operational functions which are critical for the performance of regulated activities, listed activities or ancillary services on a continuous and satisfactory basis, ensure that it takes reasonable steps to avoid undue additional operational risk. The firm must not also undertake the outsourcing of important operational functions in such a way as to impair materially the quality of its internal control and the ability of the FSA to monitor the firm's compliance with all obligations under the regulatory system and, if different, of a competent authority to monitor the firm's compliance with all obligations under MiFID.

On 16 May 2007 the FSA issued a press release confirming that in the future its supervision of outsourcing by firms will take into account industry guidance which has been issued by MiFID Connect.

This is the first guidance developed by industry which the FSA has recognised since publishing its Discussion Paper 'FSA Confirmation of Industry Guidance' in November 2006, and the first formal industry guidance related to MiFID. The guidance covers common platform firms.

Michael Folger, FSA Director of Wholesale and Prudential Policy, said:

"We stressed in our paper last month on Principles-based Regulation that industry guidance will play a key role in helping firms determine how best to meet our expectations in the new regulatory environment. We think it right to proactively confirm this MiFID Connect guidance now ahead of our formal response later this year to the comments we have received on the industry guidance Discussion Paper. It will help common platform firms ensure their existing outsourcing arrangements will meet the FSA's new requirements from 1 November 2007, when MiFID comes into effect. Firms need to start checking their approach now as MiFID does not exempt existing outsourcing arrangements."