Principles On Outsourcing Of Financial Services For Market Intermediaries

PRINCIPLES ON OUTSOURCING OF FINANCIAL SERVICES FOR MARKET INTERMEDIARIES A CONSULTATION REPORT OF THE INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS STANDING COMMITTEE 3 ON MARKET INTERMEDIARIES AUGUST 2004 This report is for public consultation purposes only and it has not been approved by the IOSCO Technical Committee or any of its member securities commissions. Any final report will be submitted to the IOSCO Technical Committee for approval at the conclusion of the consultation process. Preamble The IOSCO Technical Committee Standing Committee 3 on Market Intermediaries has published for public consultation this Consultation Report on Principles on Outsourcing of Financial Services for Market Intermediaries. The Consultation Report sets out a set of principles that are designed to assist regulated entities in determining the steps they should take when considering outsourcing activities. The Consultation Report also contains some broad principles to assist securities regulators in addressing outsourcing in their regular risk reviews of firms. Some members of IOSCO’s Standing Committee on Market Intermediaries will be surveying industry participants in their respective jurisdictions for information regarding current outsourcing practices. The Consultation Report will be revised and finalized after consideration of all comments received from the public and all information gathered through the surveys conducted by IOSCO members. The form of the survey also is available on the IOSCO website. After the consultation process, the IOSCO Technical Committee’s Standing Committee on Market Intermediaries will submit a final report on Principles on Outsourcing of Financial Services for Market Intermediaries to the IOSCO Technical Committee for approval. How to Submit Comments Comments may be submitted by one of three methods. To help us process and review your comments more efficiently, please use only one method. Important: All comments may be made available to the public unless the respondent requests that they be kept confidential. 1. E-mail • Send comments to mail@oicv.iosco.org. • The subject line of your message must indicate “Public Comment on Principles on Outsourcing of Financial Services for Market Intermediaries.” • If you attach a document, indicate the software used (e.g., WordPerfect, Microsoft WORD, ASCII text, etc.) to create the attachment. • DO NOT submit attachments as HTML, PDF, GIF, TIFF, PIF, ZIP, or EXE files. OR 2. Facsimile Transmission Send by facsimile transmission using the following fax number: 34 (91) 555 93 68. OR 3. Paper Send 3 copies of your paper comment letter to: Philippe Richard IOSCO Secretary General Oquendo 12 28006 Madrid Spain Your comment letter should indicate prominently that it is a “Public Comment on Principles on Outsourcing of Financial Services for Market Intermediaries.” IOSCO STANDING COMMITTEE 3 CONSULTATION REPORT ON PRINCIPLES ON OUTSOURCING1 OF FINANCIAL SERVICES FOR MARKET INTERMEDIARIES I. Introduction The volume of activities that regulated market intermediaries (“outsourcing firms” or “firms”) outsource to third party service providers (“service providers”) continues to increase. For purposes of this paper, “outsourcing” is defined as an event in which a regulated outsourcing firm contracts with a service provider for the performance of any aspect of the outsourcing firm's regulated or unregulated functions that could otherwise be undertaken by the entity itself.1 It is intended to include only those services that were or can be delivered by internal staff and management. 2 As discussed in Section II, the service provider may be a related party within a corporate group, or an unrelated outside entity. The service provider may itself either be regulated (whether or not by the same regulator with authority over the outsourcing entity), or may be an unregulated entity.3 The utilization of outsourcing by the financial services industry can provide a number of substantial benefits. For example, it may permit financial firms to obtain necessary expertise at a lower cost than might be possible by hiring internal staff, and permits firms to focus on their core business. By lowering costs, outsourcing may also permit smaller firms and start-up companies to break into the market and increase market competition. Outsourcing also poses a number of challenges, however, both for financial firms that choose to undertake such a strategy, and for the regulators of such firms. With respect to the financial firm, transferring a function to a third party may have a detrimental impact on the