With the introduction of “Chapter 8 Outsourcing” the UK’s Financial Services Authority (FSA) has shifted from merely providing guidance on outsourcing best practice to imposing a mandatory framework. It will apply to both new and existing outsourcings.


Chapter 8 has been introduced as part of the UK implementation of the EU’s Markets in Financial Instruments Directive (MiFID) and the Capital Requirements Directive.

It contains a checklist of the key issues that must be addressed in the outsourcing contract, including: performance measurement, supervision, step-in rights, retention of expertise by the regulated firm, provider reporting obligations, termination rights, audit and access rights for the regulated firm, its auditors, the FSA and competent authorities, obligations on the provider to co-operate with the FSA and competent authorities, data security and disaster recovery.

Application of the new rules

While the new framework is largely a codification of existing market best practice the following points should be noted: 

  • it comes into full effect from 1 November 2007, but some firms will already be affected; 
  • compliance is mandatory for any outsourcing involving a “critical or important” function. For all other outsourcings, regulated firms must still apply Chapter 8 in a “proportionate” manner; 
  • due skill, care and diligence must be exercised when entering into, managing or terminating the outsourcing of critical or important functions; and 
  • regulated firms must still notify the FSA of proposed new outsourcings or significant changes to existing arrangements.

Status of industry guidance

The guidance issued in May 2007 by MFID Connect (a collection of influential finance sector industry associations) attempts to clarify how Chapter 8 will apply in practice.

The guidance has now also been “officially recognised” by the FSA. This is significant as the current policy of the FSA under its principles based approach to regulation, is that it will not take action against a firm which has complied with FSA recognised industry guidance.

Action required

Both old and new finance sector outsourcing contracts will need to be reviewed for compliance with Chapter 8. For existing contracts, compliance may require entering into side agreements to ensure a right of access to the outsourcing provider’s premises for the FSA and other competent authorities.