Regulators globally have expressed concerns over how financial institutions that outsource business-critical functions operate their relationships with third-party service providers, whether they have robust and independent controls over any risk that might occur and, likewise, the potential implications of those service providers operating similar relationships with other financial institutions.
Indeed, transparency and control have become hallmarks of the financial services industry, with investors now fully aware that although a function can be outsourced, reputation management cannot. If a client’s investment is affected, investors will not exempt their financial institution from responsibility just because an error arose at the outsourced partner.
Outsourcing arrangements are now prevalent across the fund management value chain. The asset managers, asset owners and administrators that are party to these arrangements have struggled to varying degrees with the challenge of delivering the appropriate level of oversight without replicating or ‘shadowing’ outsourced functions. The latter can have the effect of eroding the economic value that outsourcing would otherwise deliver.
Nevertheless, the role of effective and independent oversight is now recognised as a positive and mutually beneficial dynamic. Timely detection and remediation of service ‘blips’ prior to investor impacts occurring can strengthen the relationship and support a more objective understanding of the service interface.