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UBS Investment Bank Comments on CEBS Consultation Paper on High Level Principles on Outsourcing

Core Content

The Consultation Paper (CP) published by the Committee of European Banking Supervisors (CEBS) on 30 April 2004 outlines high-level principles for outsourcing in the financial services sector. UBS Investment Bank (UBS-IB), as part of UBS AG—a global investment services firm with operations in over 50 countries—welcomes the initiative but raises several concerns regarding the proposed principles and their implementation.

Main Views and Key Points

1. Prohibition on Outsourcing Strategic or Core Activities

• UBS-IB is concerned about the blanket prohibition on outsourcing strategic or core activities without clear definitions.
• The lack of specific criteria makes the prohibition overbroad and difficult to apply in a dynamic regulatory environment.
• The bank believes that dialogue with regulators is essential to determine which activities are suitable for outsourcing, especially given the evolving nature of the practice.

2. Level of Detail and Regulatory Prescription

• UBS-IB supports supervisory convergence but notes that the proposed principles are more stringent than those in some Member States.
• It advocates for minimum harmonisation and flexibility in regulatory approach to reflect the current environment.
• The Committee of European Securities Regulators has indicated it will not propose a complete ban on outsourcing core business.

3. Intra-group vs. Extra-group Outsourcing

• The CP does not adequately differentiate between intra-group and extra-group outsourcing.
• UBS-IB argues that intra-group arrangements are inherently lower risk and do not require the same level of regulatory intervention.
• A proportional approach is needed, allowing for more flexibility in intra-group contexts.

4. Authorisation of Outsourcing Service Provider

• The CP defines outsourcing service providers as either authorised or unauthorised entities.
• UBS-IB requests guidance on whether regulated entities should be required to be supervised by a supervisory authority.

5. Definition of "Purchasing"

• The definition of outsourcing does not include purchasing contracts, which may involve the transfer of significant information.
• The bank seeks clarification on the accuracy of the definition and its applicability to real-world scenarios.

6. Direct Access to Outsourcing Service Provider

• UBS-IB questions the necessity of direct access to the outsourcing service provider by supervisory authorities.
• It suggests that senior management can provide the necessary information, and that flexibility should be maintained in access requirements.

7. Restriction on Outsourcing Authorised Services

• The CP prohibits outsourcing of authorised services unless the service provider is authorised or acts as an agent.
• UBS-IB requests clarification on the term "agent" and how it will be applied in practice.
• It also seeks guidance on how this rule applies to activities like safeguarding assets and holding client money.

8. All Outsourcing Arrangements Subject to Contract

• UBS-IB believes the requirement for formal and comprehensive contracts is overbroad.
• It argues that flexibility is needed, particularly for intra-group arrangements, where alternative controls may be more appropriate.

9. Access to External Auditor Information

• The CP prescribes that outsourcing service providers should make external audit information available.
• UBS-IB questions the practical feasibility of this requirement and the confidentiality implications.
• It calls for more detailed proposals on how this should be implemented.

10. Cancellation of Outsourcing Arrangements

• UBS-IB supports the principle that senior management bears ultimate responsibility for outsourcing risks.
• However, it is concerned about the prescriptive nature of the proposal allowing supervisory authorities to cancel outsourcing arrangements.
• It suggests that such actions should be reserved for exceptional cases and that ongoing dialogue with regulators can prevent the need for intervention.

11. Sub-contracting by Outsourcing Service Providers

• UBS-IB requests clarity on whether sub-contractors are subject to the same principles as the primary outsourcing service providers.
• It raises concerns about regulatory oversight of sub-contractors and the potential burden on them.
• The bank supports monitoring sub-contracting but believes the current formulation is too vague to be effective.

Conclusion

UBS-IB appreciates the CEBS initiative to promote supervisory convergence and a common regulatory framework for outsourcing. However, it believes that the current draft is too rigid and lacks clarity on key aspects. The bank urges CEBS to adopt a more flexible and proportionate approach, ensuring that principles are tailored to risk and that dialogue with regulators is encouraged rather than restricted.