Survey Results On Outsourcing Of Financial Services

SURVEY RESULTS ON OUTSOURCING OF FINANCIAL SERVICES TECHNICAL COMMITTEE OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS FEBRUARY 2005 I. Introduction On August 2, 2004, the IOSCO Technical Committee’s Standing Committee on the Regulation of Market Intermediaries (SC3) issued a Consultation Report on outsourcing for the securities industry, which presented a set of Outsourcing Principles designed to assist regulated entities in determining the steps they should take when considering outsourcing activities. The Principles are designed to assist securities regulators in addressing outsourcing in their regular risk reviews of firms. Following the August issuance of the Consultation Report setting forth the draft Outsourcing Principles, members of SC3 surveyed industry participants regarding their current outsourcing practices, and the survey was also posted on the IOSCO website. Survey reports were received from Australia, France, Germany, Hong Kong, Japan, Ontario, Singapore, the U.S. CFTC and the U.S. SEC, representing the three major regional areas (Europe, Asia and North America) where there are a substantial number of developed markets. The survey responses, as summarized in this Survey Report, were considered by SC3 in finalizing the Outsourcing Principles, which were approved by the IOSCO Technical Committee during it 31 January and 1 February 2005 meeting. The Technical Committee also approved on that occasion the public release of this Survey Report. a. Overall Likelihood to Outsource Overall, outsourcing is common in all reporting jurisdictions. A majority of respondent firms in each jurisdiction currently has in place some form of outsourcing arrangement. For example, 68% of respondent firms in Ontario (Canada) and 75% of respondent firms in Singapore employ some form of outsourcing. Similarly, a majority of firms in Hong Kong and the United States (under both the CFTC and SEC) and nearly all firms responding in Japan either currently outsource at least one function or plan to outsource some activity in the future. In general, the survey revealed no correlation between the size of a firm and the likelihood of the firm to engage in outsourcing. A vast majority of respondent firms in all jurisdictions outsource less than 25% of their business.1 For example, the U.S. CFTC reported no firms in which outsourcing services account for greater than 25% of their total expenses. Ontario, Singapore and Japan each reported a small percentage of respondent firms with outsourcing arrangements exceeding 25% of their total expenses2. Whether or not a firm’s size plays a role in outsourcing is unclear. Hong Kong reported that firms with fewer employees (between 1-10 employees) tended to outsource a greater percentage of their activities (11%-25% or greater). By contrast, Japan reported the opposite, with larger firms (more than 100 employees) tending to outsource at a higher ratio than smaller firms.3 1 The total value of outsourcing services provided to a firm is calculated as a percentage of a firm’s total expenses. 2 Ontario reported one of the 17 respondent firms that outsource, Singapore reported one of the 12 respondent firms that outsource and Japan reported five of the 46 respondent firms that outsource, have arrangements exceeding 25% of their total expenses. 3 One key exception is in the case of foreign securities firms in Japan, in which the bigger firms tended to outsource at a lower ratio than small firms. 2 b. Functions Outsourced A variety of functions are outsourced across a majority of jurisdictions, including human resource functions such as payroll, internal accounting, compliance supervision, securities research and information technology functions such as data backup and record retention and storage. In Germany, regulations prohibit the outsourcing of primary management functions, and all respondent firms in Germany reported keeping treasury activities in-house. Firms in Hong Kong reported a policy of not outsourcing core functions such as supervisory, monitoring, management and control functions, and any decisions regarding the commencement or discontinuation of business or business relationships. In Singapore, most firms do not have written policies on those functions they would not outsource, but some firms stated they would not outsource core business functions or those that would generate value for their cu