MiFID - FSA confirms Industry Guidance on outsourcing

MiFID - FSA confirms Industry Guidance on outsourcing

The Financial Services Authority (FSA) today (16 May 2007) confirmed that its supervision of outsourcing by firms will in future take account of industry guidance which has been issued by MiFID Connect.

This is the first guidance developed by industry which the FSA has recognised since publishing its Discussion Paper 'FSA confirmation of Industry Guidance' in November 2006, and the first formal Industry Guidance related to the Markets in Financial Instruments Directive. The guidance covers so-called 'common platform' FSA firms - those subject to MiFID and/or the Capital Requirements Directive. MiFID Connect is a joint project set up by 11 trade associations to support their members in implementing the Directive.

The Discussion Paper set out plans to encourage greater use of Industry Guidance as the FSA moves toward a more principles-based approach to regulation.

Michael Folger, FSA Director of Wholesale and Prudential Policy, said:

"We stressed in our paper last month on Principles-based Regulation that industry guidance will play a key role in helping firms determine how best to meet our expectations in the new regulatory environment. We think it right to proactively confirm this MiFID Connect guidance now ahead of our formal response later this year to the comments we have received on the industry guidance Discussion Paper. It will help common platform firms ensure their existing outsourcing arrangements will meet the FSA new requirements from 1 November 2007, when MiFID comes into effect. Firms need to start checking their approach now as MiFID does not exempt existing outsourcing arrangements."

The FSA has worked closely with MiFID Connect over several months to ensure that its outsourcing guidance meets the recognition criteria. The guidance strikes a balance between legal interpretation and practical examples and will act as a benchmark for future industry guidance requests. Then FSA will review the wording of its confirmation of the guidance in light of its formal response to the Discussion Paper.

Notes:

1. The MiFID-driven FSA outsourcing rules, which will operate from 1 November 2007 are in Chapter 8 of the FSA's Senior Management Arrangements, Systems and Controls (SYSC) sourcebook. These include that a common platform firm must, when relying on a third party for the performance of operational functions which are critical for the performance of regulated activities, listed activities or ancillary services on a continuous and satisfactory basis, ensure that it takes reasonable steps to avoid undue additional operational risk; must not undertake the outsourcing of important operational functions in such a way as to impair materially the quality of its internal control and the ability of the FSA to monitor the firm's compliance with all obligations under the regulatory system and, if different, of a competent authority to monitor the firm's compliance with all obligations under MiFID

2. The 11 members of MiFID Connect are The Association of British Insurers (ABI), The Association of Private Client Investment Managers and Stockbrokers (APCIMS), Association of Foreign Banks (AFB), The Bond Market Association, the British Bankers' Association (BBA), Building Societies Association (BSA), the Futures and Options Association (FOA), The International Capital Market Association (ICMA), Investment Management Association (IMA), The International Swaps and Derivatives Association (ISDA) and the London Investment Banking Association (LIBA)

3. The MiFID Connect guidance on outsourcing can be found on the BBA website.

4. DP 06/5 'FSA confirmation of Industry Guidance' sets out the FSA's thinking on the role of Industry Guidance in a more principles-based regulatory structure. The paper:

   • recognised that industry guidance is not new, but already exists in different parts of the regulatory system
   • made clear that industry guidance will supplement rules not replace them;
   • set out a standard process for FSA to recognise industry guidance;
   • made clear the standards that will be applied in recognising such guidance; and
   • confirmed that the FSA will not take action against a firm which has complied with recognised guidance covering the issue concerned.

5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.

6. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.