An increasing number of asset managers' activities are outsourced by asset managers and the FSA has noted that the outsource providers used are typically part of complex international banking groups. As these organisations have balance sheet exposure to activities other than the provision of outsourcing activities, this has raised concerns that asset managers would not be able to perform critical regulated activities if the outsource provider were to face financial distress or operational disruption from within the group.

For this reason, the FSA has published a "Dear CEO" letter in relation to asset managers' outsourcing arrangements, raising a number of concerns about the effectiveness of firms' recovery and resolution plans. In particular, the regulator highlights a number of key issues that should be considered as part of firms' contingency planning.

In the event that the primary outsource provider becomes unable to perform the delegated activities, the FSA is concerned that re-assigning those activities to another outsource provider would take too long and may even be an unrealistic prospect in some cases. However, it seems there are also associated difficulties of taking all those outsourced activities back in house too, as firms would not immediately have the required expertise or capacity to carry out those roles.

Ultimately, it is down to the boards to ensure that the various implications of outsourcing have been properly considered and that there is a plan in place to enable the asset manager to continue carrying out its regulated activities even if the outsource provider fails. The Dear CEO letter asks firms to review their plans and ensure that they take these concerns into consideration.