UK asset managers are putting procedures in place to handle the failure of an outsourced service provider but need to improve their oversight processes, according to regulator the Financial Conduct Authority (FCA).
An FCA thematic review into how asset managers use outsourced services found a significant improvement in the plans implemented to mitigate the risks of a service provider going out of business.
In 2012, the FCA’s predecessor, the Financial Services Authority, found that UK asset managers were unprepared for an outsourced provider to fail and had inadequate contingency plans in place for how they would ensure service continuity and maintain their operations if the worst were to happen.
The FCA found that, over the past year, the industry has made substantial progress in improving its procedures.
“We are pleased with the level of engagement from asset managers in response to our Dear CEO letter and during 2013 we have started to see improvements in asset managers’ planning for the failure of a service provider,” the regulator said.
Cath Rawcliffe, vice president of UK sales and marketing at SimCorp, a provider of software for asset managers, said her firm’s clients have increased their focus on contingency plans.
“A lot of clients see that the regulator is taking this issue very seriously and are keen to work together to ensure that they have the risk management and oversight in place to minimise the potential for disruption,” she said.
The FCA was also pleased with firms’ progress on providing oversight of their outsourced providers, though it said this could vary significantly between different firms.
“The effectiveness of oversight arrangements varied from firm to firm, with only some asset managers able to demonstrate high standards of oversight consistently across all outsourced activities,” its report reads. “Where oversight of an activity was lacking, we found the main cause was insufficient internal expertise to carry out the oversight. “
At The TRADE Agora event in London in September, the attitude of regulators was seen as a potential barrier to buy-side firms adopting a more outsourced model.
The increased clarity provided in the thematic review could give more firms the incentive to outsource their services, according to Jay Hibbin, commercial director at market infrastructure technology provider MarketPrizm.
“Outsourcing has become a mature market in recent years. Provided firms using those services have a backup plan in place, they shouldn’t fall foul of the regulator when they purchase managed services,” he said.
Rawcliffe added that, while the FCA’s review is positive, firms should ensure they keep working to manage the risks and improve their oversight.