The Hong Kong Insurance Authority (HKIA) recently issued a Guidance Note on Outsourcing (GN14). As the GN14 notes, it is increasingly common for financial services providers to have business activities they would usually undertake themselves carried out by external parties.

For insurers these activities have traditionally included the usual 'back-office' functions of accounting, payroll, human resources and information technology support but now often extend to application processing and policy and claims administration.

The main aim is usually to reduce and control operating costs but outsourcing can be used for other strategic gains such as freeing up resources for other projects or enabling access to 'state of the art' external capabilities. The major disadvantage is that outsourcing increases an insurer’s reliance on outside entities. These arrangements are also becoming more complex and now often with service providers outside Hong Kong.

Outsourcing gives rise to a number of issues. To quote from the 2005 Report on Outsourcing in Financial Services prepared by the Joint Forum - set up by the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions and the International Association of Insurance Supervisors:

"In these situations, how can financial service businesses remain confident that they remain in charge of their own business and in control of their own business risks? How do they know they are complying with their regulatory responsibilities? How can these businesses demonstrate that they are doing so when regulators ask?"

The report sets out a number of high-level principles on outsourcing for financial firms and goes on to give guidance for financial services firms and regulators in effectively managing risks involved in outsourcing without, it claims, hindering the efficiency and effectiveness of how those firms operate.

GN14 is very much based on these principles and adopts much of this guidance. It remains to be seen if the HKIA has struck the right balance between regulatory oversight, risk management and commercial considerations.