Outsourcing Arrangements and the BMA’s Guidance Notes (2019)
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Globalisation and the opportunities enabled by the continued emergence of international business remain at the forefront of commercial thinking. Combined with continuous and innovative developments in technological capabilities, outsourcing is increasingly recognised as an effective way to obtain relatively straight-forward access to new technologies and to achieve economies of scale.
Historically, we have seen various international regulatory bodies, such as the European Banking Authority (February, 2019) and the Basel Committee on Banking Supervision (as early as February, 2005), establishing guidance for relevant licensed entities on outsourcing arrangements, with the Bermuda Monetary Authority (“BMA”) publishing comprehensive guidance notes governing such arrangement in June, 2019. The BMA informs that such guidance notes will come into force from May 2020.
Entities impacted by the BMA’s guidance notes are: Banks, the Bermuda Stock Exchange, Corporate Service Providers, Deposit Companies, Money Service Businesses, Trust Companies, Investment Businesses, Fund Administrators and the Credit Union. Furthermore, it is critical to appreciate that the basis of such guidance notes derives from a common global consensus on issues associated with risk transfer particularly, but not exclusively, on a cross-border basis. Be it in the international environment and also locally, an increased reliance on the outsourcing of activities and key functions may impact the ability of relevant licensed entities to manage their risks. Consequently, the Outsourcing Guidance Notes are aimed at ensuring that such entities apply key risk management principles and ultimately remain able to monitor their compliance with regulatory requirements.
Moreover, conceptualizing that each business develops unique needs, requirements and arrangements, the Outsourcing Guidance Notes are not prescriptive in nature and it is therefore required for all impacted entities to undertake a thorough self-assessment of all business functions. The self-assessment will need to identify all activities and more specifically classify each function in terms of whether it is: performed internally or outsourced. Furthermore, subsequent to the classification of activities, Senior Management will also be required to undertake further self-assessments of outsourced activities.
Critically, outsourcing arrangements on certain key activities may expose relevant licensed entities to a higher degree of inherent risk. Such arrangements would constitute material outsourcing and failure of such functions should be assessed on the basis of four key pillars:
- Impact on Business Operations;
- Impact on Reputation;
- Impact on Financial Performance; and
- Impact on the Company’s ability to manage Risk, including the ability to comply with Bermuda laws and regulations.
Impacted entities will therefore need to consider a variety of factors, identify existing outsourcing arrangements that constitute a material outsource and subsequently Senior Management are presented with two main options. Primarily, impacted entities may seek prior approval for materially outsourced functions from the BMA (which closes on the 3 January 2020), or else impacted entities may undergo a CEO (or a Senior Executive nominated by the Board in cases where a relevant licensed entity does not have a CEO) attestation route instead (which closes on the 30 April 2020).