CBI recommendations for outsourcing
During 2016, CBI reviewed the outsourcing arrangements of several fund administrators. Its objective was to ascertain the level of outsourcing performed by fund administrators and the governance and oversight in place for these outsourced activities.
Its findings highlight an extensive use of outsourcing in the industry, which places considerable demands on fund administrators to demonstrate good governance, managerial oversight, and independent assurance.
CBI found that across some larger administrators, between 48% and 61% of fund administration activities were carried out by outsourced service providers (OSPs). On average, these firms had up to 10 different service locations, with concentration exposure to one or multiple locations. Firms outsourced primarily to other group entities, ensuring the operational activities remained within the administration company’s ecosystem.
CBI made recommendations in three core areas:
- Management and internal control measures
- Support function oversight and monitoring
- Independent assurance
Management and Internal Controls
Each firm should have an outsourcing team structure, an outsourcing governance forum, and legally binding agreements in place with each of its OSPs. Firms should have clearly documented policies for the governance of outsourced activities. CBI recommends that firms have a readily retrievable and current centralized log of all outsourced arrangements.
When outsourcing activities, firms must ensure they can take back the activity in the event of a service disruption. CBI noted some firms demonstrate good practice in this regard already, but the minimum expectation is for annual take back testing.
All firms must also maintain detailed and comprehensive business continuity plans (BCPs). CBI noted that while all providers had evidenced good practice around their OSPs’ BCPs, firms must align these with their own BCPs for adequacy, effectiveness, and periodic tests.
The day-to-day operations of each outsourced activity must be governed by legally enforceable service level agreements. This is in place across fund administrators, however CBI recommends that all procedural documents pertaining to outsourcing must be reviewed at least annually. It was noted all firms use KPIs and review these daily, weekly, and monthly.
CBI outlines clear recommendations that need to be conducted by each firm, given the varied due diligence approaches across firms. It highlights positive examples of onsite training provided by OSPs and recommends that formalized training programs are in place for outsourcing requirements.
To learn more about recommendations, read “Outsourcing in the Funds Industry – Part Two”.