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ESBG Response to CEBS Consultation Paper on Outsourcing

Core Content Overview

The European Savings Banks Group (ESBG), representing 24 European countries and 968 savings banks with over 65,000 branches and 757,000 employees, responded to the Committee of European Banking Supervisors (CEBS) consultation paper on high-level principles for outsourcing. The ESBG emphasized the need for a clear, flexible, and consistent regulatory framework that balances risk management with the practical benefits of outsourcing.

Main Views and Key Points

1. Definition of Outsourcing

• Permanent transfer of activity should be the basis for considering something as outsourcing, not individual tasks.
• Strong link to banking activities is essential; only those activities closely connected to banking services should be subject to the guidelines.
• Exemptions should be extended to include areas like leasing, renting, and certain data processing solutions, provided they are thoroughly tested.
• Interim workers who are fully integrated into the credit institution should not be considered outsourcing.

2. Intra-Group Outsourcing

• A lighter regime should apply to intra-group or intra-company outsourcing within the EU, especially when the service provider is already supervised.
• The ESBG opposes classifying intra-group transfers as outsourcing, as it would increase administrative burdens without reducing risk.
• It is recommended to exclude certain functions from the CEBS framework, including:
  • Clearing functions
  • Securities trading systems
  • Authorization centres for electronic cash transactions
  • Central banking functions
  • Integration of lead managers in syndicated credit

3. Flexibility for National Supervisors

• The ESBG supports pan-European guidelines but believes national supervisors should retain flexibility to account for local market conditions and risk factors.
• Exemptions for individual cases should be allowed to avoid unnecessary administrative and financial costs.

4. Vendor Governance Approach

• The ESBG suggests the adoption of a Vendor Governance Approach to manage outsourcing relationships effectively.
• This includes:
  • Understanding the client's objectives
  • Ensuring vendor performance aligns with contractual terms
  • Balancing performance with business objectives
  • Aligning operational processes with the vendor
• These principles apply to four areas: relationship, technical, contract, and performance processes.
• Vendor governance should not be outsourced and must be properly resourced.

5. Supervisory Access and Control

• The ESBG calls for clarification on whether supervisory authorities should have direct access to the institution's databases.
• For outsourcing to foreign service providers, cooperation agreements among supervisors are recommended to avoid overlap and ensure clarity on responsibilities.
• The ESBG opposes granting supervisory authorities the right to cancel outsourcing contracts directly, as it would conflict with civil law principles and be impractical.

6. Concentration Risk

• CEBS' Principle X highlights concentration risk, but the ESBG argues that multiple outsourcing service providers may reduce risk due to greater expertise and shared costs.
• It requests more information on why concentration is considered an additional risk.
• The ESBG suggests that "multiple" service providers should not be subject to unlimited control by individual institutions to preserve cost and scale efficiencies.

7. Contingency Planning and Exit Strategy

• ESBG supports the need for contingency planning and clear exit strategies.
• It emphasizes the distinction between intra-group and external outsourcing.
• It is recommended that internal units oversee the overall outsourcing strategy, while local units handle day-to-day supervision and management.

8. Service Level Agreements (SLA)

• The ESBG agrees that SLAs are important for complex outsourcing, but not always necessary for non-complex activities.
• A written description of the service should suffice in such cases.
• CEBS guidelines should clarify that service requirements should be detailed in writing.

9. Reporting Requirements

• The ESBG is concerned that reporting all serious problems to the supervisory authority could create unnecessary bureaucratic burdens.
• It suggests a distinction between very serious problems (to be reported immediately) and less serious ones (to be reported annually or upon request).
• Minor problems should not be required to be reported, as they can be handled internally.

Conclusion

The ESBG advocates for clear, flexible, and practical outsourcing guidelines that support the core banking functions while allowing for innovation and efficiency. It emphasizes the importance of consistency across regulatory bodies and the need to avoid over-regulation that could discourage banks from outsourcing. The group also highlights the importance of vendor governance and the need for clarity on supervisory access, control, and the implications of concentration risk.