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FBE Summary on Consultation Paper on High Level Principles on Outsourcing

Core Content

The European Banking Federation (FBE) has provided detailed comments on the CEBS consultation paper on the High Level Principles on Outsourcing. The paper aims to promote supervisory convergence across the European Union, which is seen as essential for the functioning of the Single Market. The FBE generally supports this initiative but emphasizes the need for a balanced and proportionate approach to outsourcing regulation.

Main Views and Key Information

1. Outsourcing as a Bank's Decision

• Outsourcing is a business decision made by the bank based on economic and risk considerations.
• Banks must retain responsibility for the final quality of services they outsource.
• The FBE stresses that outsourcing should not be overly regulated, as it could hinder innovation and operational flexibility.

2. Use of Basel Committee Guidelines

• The FBE recommends that CEBS should reference Basel Committee documents such as:
  • "Sound Practices for the Management and Supervision of Operational Risk" (February 2003)
  • "Framework for Internal Control Systems in Banking Organisations" (October 1998)
  • "Framework for the Evaluation of Internal Control Systems" (January 1998)
• These documents provide a solid basis for risk analysis and should be used by both banks and supervisors.

3. Definition of Outsourcing

• The FBE believes that a pan-European definition of outsourcing is necessary for consistent treatment in the Single Market.
• The current definition is considered too generic, which may lead to national-level interpretations and reduce the effectiveness of the initiative.
• The definition should focus on transferring internal functions or activities to third parties, excluding basic utilities, purchasing contracts, and advisory services.

4. Core and Strategic Activities

• The FBE is concerned that the definition of core and strategic activities is too rigid and should be context-dependent, considering the size and complexity of the institution.
• They argue that exceptional cases of outsourcing are not clearly defined and could stifle necessary operational adaptations.
• A distinction should be made between outsourcing to authorized and unauthorized financial institutions.

5. Pre-Notification and Information

• The FBE opposes the pre-notify requirement, which is deemed ambiguous.
• They recommend duly informing the supervisory authority of major changes, not necessarily pre-authorizing them.
• The FBE also believes that supervisory authorities should not have the right to cancel outsourcing agreements, as this could interfere with contractual relationships.

6. Contractual Requirements

• All outsourcing arrangements should be formal and comprehensive contracts.
• The outsourcer should have the right to audit the outsourced process, but the bank should retain the choice of conducting the audit itself or relying on internal or independent audit firms.

7. Concentration Risk

• The FBE highlights the risk of concentration when multiple banks outsource to the same provider.
• They suggest CEBS explore a global assessment of outsourcing risks across jurisdictions to identify potentially problematic service providers.

Conclusion

The FBE supports the CEBS initiative but urges caution to avoid overly prescriptive regulations. They advocate for a risk-based, flexible approach to outsourcing that encourages innovation while ensuring supervisory oversight remains effective and proportionate. The FBE also calls for clarity in definitions, alignment with international standards, and collaboration between supervisors and institutions to achieve convergence without stifling the banking industry's development.