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BBA Response to CEBS Consultation Paper on High Level Principles on Outsourcing Summary

Core Content

The British Bankers' Association (BBA) has responded to the CEBS Consultation Paper on High Level Principles on Outsourcing, offering feedback on the proposed regulatory framework. The BBA represents over 250 banks operating in the UK, including major European banks in London. It has been a key player in discussions with the Basel Committee and European banking supervisors regarding the Basel Accord and its implementation.

The BBA acknowledges that the High Level Principles are still a work in progress and supports the pursuit of supervisory convergence. However, it emphasizes the importance of maintaining flexibility and competitiveness in the banking sector, which could be compromised by overly prescriptive principles.

Main Views

• Flexibility and Risk Management: The BBA believes that banks should retain the autonomy to outsource based on their own risk and cost-benefit analysis. They argue that current practices should not be overly restricted, as this could increase costs, reduce the number of service providers, and stifle innovation.

• Regulatory Scope: The BBA is concerned that the paper may suggest regulating outsourced service providers, which are currently unregulated in the UK unless they perform controlled functions. Such a move could create barriers to entry and negatively impact the market.

• Definition of Outsourcing: The BBA agrees that a consistent definition across the EU is challenging but stresses the need for clarity. They suggest that the definition should focus on the transfer of a material internal activity to a third party and distinguish between intra-group and external outsourcing.

• Strategic and Core Activities: The BBA disagrees with the CEBS position that strategic or core management responsibilities should not be outsourced except in exceptional cases. They argue that this is too conservative and not aligned with current regulatory policies in the UK.

• Material Activities: The BBA supports the concept of materiality in outsourcing and suggests that banks should be free to outsource non-material activities based on commercial rationale. They also emphasize the need for convergence among supervisors in identifying material activities.

• Contractual Requirements: The BBA agrees that all outsourcing arrangements should be governed by a formal and comprehensive contract. They highlight the importance of audit rights and compliance with legal data transfer requirements in the context of offshoring.

• Service Level Agreements (SLAs): While the BBA supports the use of SLAs, they suggest that the principle should not be overly prescriptive and should allow for flexibility in cases where SLAs may not be necessary.

Key Recommendations

• Avoid Overly Prescriptive Principles: The BBA encourages CEBS to recognize existing risk management practices and avoid imposing rigid rules that could limit flexibility and competitiveness.

• Clarity in Definitions: A clear and focused definition of outsourcing is needed to ensure consistent treatment across the EU.

• Materiality Focus: Supervisors should focus on whether an outsourcing activity is material, rather than imposing blanket restrictions.

• Audit Rights and Data Compliance: Contracts should include audit rights for supervisory bodies and ensure compliance with legal data transfer requirements.

• Concentration Risk: CEBS should explore the feasibility of a global assessment of outsourcing arrangements to identify critical and connected risks posed by concentrated service providers.

• Sub-Contracting: The principle of chain outsourcing should be limited to key sub-contractors that have a material impact on the outsourced service.

• Supervisory Intervention: The BBA considers the right to cancel an outsourcing agreement too far-reaching and not legally acceptable, suggesting that reliance on audit mechanisms is more appropriate.

Conclusion

The BBA's response underscores the importance of balancing regulatory oversight with the need for flexibility in outsourcing practices. They advocate for a risk-based approach, clarity in definitions, and the development of supervisory principles that support innovation and competition while ensuring effective risk management.