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13 December 2012 | Adam Leach
The Financial Services Authority (FSA) has written to asset management firms warning they are putting their operations at risk outsourcing back office functions to banking groups.
In a letter sent to CEOs this week, the financial watchdog said it was concerned if outsourcing providers were to face “financial distress or severe operational disruption”, UK asset managers would be unable to perform certain key functions. The concerns stem from the fact, in general, the firms outsource certain functions to “international banking groups” which face significant financial risks.
In the letter, Clive Adamson, director of supervision in the conduct business unit at the FSA, said: “At group level, these organisations will have balance sheet exposure to activities other than the provision of outsourcing activities. Our concern is if an outsource provider were face financial distress or severe operation disruption, UK asset managers would not be able to perform critical and important regulated activities, thereby causing detriment to customers.”
Adamson explained the current contingency arrangements put in place by asset managers also gave cause for concern. He explained the most common contingencies employed by the companies relied on the ability to take the service back in-house, the ability to transfer the services to another provider, or being able to ‘step in’ and take over if problems arose. These measures, he explained, would still cause significant disruptions. He also indicated some firms were relying on the outsource provider being deemed “too big to fail”, meaning if it did encounter financial difficulties, it would be bailed out by the bank.
He called on the industry to reassess the risks around outsourcing certain functions. In his letter, he said: “Based on our findings so far we are not confident that across the industry, effective recovery and resolution plans are in place for the asset management sector as a whole.”