Financial institutions must monitor risks and ensure compliance with regulators when they outsource parts of their business to third parties, the Bank for International Settlements (BIS) said yesterday.
In a paper published on its website, the BIS said banks, brokers and insurance companies that outsource activities such as back-office administration or call centers to other companies to save costs need to remember that they also transfer risks, management and compliance requirements to those third parties.
“Industry and regulators acknowledge that this increased reliance on outsourcing of activities may impact on the ability of regulated entities to manage their risks and monitor their compliance with regulatory requirements,” said the BIS. “Among the specific concerns raised … is the potential for over-reliance on outsourced activities that are critical to the ongoing viability of a regulated entity as well as its obligation to customers.”
The BIS said those risks could be mitigated by comprehensive and clear outsourcing policies, effective risk management programs, contingency planning by the outsourcing firm and a clear understanding of the financial and other resources of the service provider.