FSA has written a “Dear CEO” letter to asset managers about the risks to its objectives posed by outsourcing by the sector. It has noted an increase in outsourcing and that there are few service providers, most of whom are members of complex international financial groups. FSA is worried about the exposures these providers face at group level and that, should the service provider fail, asset managers will be unable to provide critical and important services to their customers. FSA has noted several concerns around contingency planning by the asset managers, including:

  • a belief regulators would “save” the group of which the service provider is a member, if it failed – FSA says this is not prudent, given the expressed regulatory attitude of allowing firms to fail;
  • taking activities back in-house – FSA says firms would be unlikely to have the resource to do this as quickly as they would need to;
  • transferring to another provider – FSA is concerned not only about the time this would take to achieve and inherent difficulties in transferring provider, but also about the availability of a suitable provider given the considerable concentration risk in the market; and
  • exercising “step in” rights – FSA thinks these may be difficult to enforce and also take too long.

FSA’s view is that many of these practices do not meet the requirements of Chapter 8 of the Senior Management Arrangements, Systems and Controls Sourcebook (SYSC). It says boards of asset managers are expected to ensure they have in place “adequate contingency plans which are viable, robust and realistic” and include workable exit strategies to cater for all possibilities, including stressed market conditions. It asks firms both to review their outsourcing arrangements with this in mind and also to engage with FSA on the concerns it raises. FSA will hold an industry event in early 2013 to discuss its expectations further. (Source: FSA Writes to CEOs on Outsourcing)