Outsourcing gained popularity in the 90s when cost savings became a cornerstone strategy in many companies. These companies started to outsource those functions that are necessary to run a company but not related specifically to its core business. Outsourcing has since evolved into the development of strategic partnerships through working with another business that offers complementary expertise to mutually expedite growth as well as offer a competitive advantage for businesses.
According to Monetary Authority Singapore (“MAS”) Guidelines on Outsourcing, outsourcing is an arrangement where a service provider provides an institution with a service that may currently or potentially be performed by the institution itself and which includes the following characteristics:
• The institution is dependent on the service on an ongoing basis
• The service is integral to the provision of a financial service by the institution, or the service is provided to the market by the service provider in the name of the institution
Examples of outsourcing arrangements
Below are some examples of outsourcing arrangements vs non-outsourcing arrangements from the perspective of a fund manager.
Key considerations before undertaking outsourcing
Before undertaking any form of outsourcing arrangement with any party including a related entity, it is imperative to take note of the following key areas of consideration and undertake the relevant assessment accordingly.
The board and senior management are primarily responsible for all of its outsourcing arrangements, including maintaining effective oversight and governance of outsourcing arrangements, evaluating the materiality of the outsourcing arrangement and managing outsourcing risks and implementing an adequate outsourcing risk management framework.
Financial institutions should evaluate the overall risks involved that may impact the institution prior to finalizing the outsource arrangement with the service provider. Some of the key considerations to be included in the evaluation should include but not limited to understanding the role and objective of outsourcing in the overall business strategy and analyzing the aggregate exposure to the outsourcing arrangement for the purposes of managing concentration risks.
In considering, renegotiating or renewing an outsourcing arrangement, it is important to subject the service provider to a comprehensive due diligence process which includes all aspects of the service provider, including but not limited to its capability to employ a high standard of care in the performance of its service obligations, business continuity arrangements in place and cybersecurity measures.
All contractual terms and conditions governing the outsourcing arrangement should be carefully reviewed and properly defined in the written agreements. At the very least, it should address the following aspects of outsourcing:
o Scope of the outsourcing arrangement;
o Performance, operational, internal control and risk management standards;
o Confidentiality and security;
o Business continuity management;
o Monitoring and control;
o Audit and inspection;
o Notification of adverse development;
o Dispute resolution;
o Default termination and early exit;
o Applicable laws
o Any other risks identified during risk evaluation or due diligence assessment
In a paper published by MAS in July 2020 on its supervisory expectations of sound practices of outsourced AML/CFT control functions following its inspections of capital markets intermediaries, the inadequate scope of outsourcing agreement was found to be key weakness noted.
Given the pandemic and advancements in the use of technology, it is no surprise that the future focus of outsourced service providers will revolve around strengthening its ability to stay in business and bouncing back from adversity as well as focusing on its cybersecurity readiness. Outsourcing will continue to grow amidst the adversity and diversity, and it will continue to provide opportunity for businesses to lessen costs and make work more efficient.
At Lymon, we have close to a decade of experience in assisting fund managers and their managed funds with their outsourcing needs, including regulatory compliance, outsourced trade operations, tax reporting and internal audit. Our deep expertise in the asset management industry, both regulatory and operationally, across a broad range of fund managers with differing investment strategies will allow us to provide tailored advice and assistance to all your business needs.
To find out more about how we can assist with your regulatory or structuring needs, do reach out to your usual contact at Lymon or our specialist below:
Jovi Gan, Director
+65 6709 4110