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BNP Paribas Feedback on CEBS Consultation Paper CP02: High Level Principles on Outsourcing

Core Content

BNP Paribas has provided feedback on the CEBS consultation paper titled "High Level Principles on Outsourcing." The letter outlines the bank's views on the principles and framework for outsourcing in the banking sector, emphasizing the importance of risk-based decision-making and regulatory clarity.

Main Views and Key Points

1. Outsourcing as a Bank's Decision

• Outsourcing should remain a strategic decision made by the bank based on economic grounds and a thorough risk analysis.
• Regulators should not prohibit outsourcing unless it directly threatens the bank's soundness.
• Banks must retain responsibility for the quality of outsourced services, typically through effective management of contractual and commercial relationships with service providers.

2. Clarification on "Core" Activities

• The concept of "strategic or core" activities is not uniform across banks and should be re-evaluated.
• BNP Paribas argues that the current proposal to restrict outsourcing of such activities is problematic.
• A segmentation approach between outsourcing to authorized and unauthorized financial institutions could be more practical.

3. Materiality Test

• BNP Paribas calls for clarity on the practical application of the materiality test.
• The test should be directly linked to activities that can affect the bank's ability to meet regulatory responsibilities or continue its business.

4. Risk Analysis and Supervisory Flexibility

• The approval process for outsourcing should not be rigid or mechanistic.
• Supervisors should balance the importance of criteria and risk factors flexibly, ensuring transparency for banks during the approval process.

5. Concentration Risk

• Concentration risk arises when multiple banks outsource similar processes to the same service providers.
• CEBS should consider a "global assessment" of outsourcing deals across jurisdictions.
• Regulators may need to impose additional controls or require diversification when outsourcing to certain providers becomes excessive.

6. Chaining of Responsibility and Accountability

• BNP Paribas highlights the risk of operational risk being amplified through multiple layers of subcontracting.
• The bank stresses the importance of ensuring that responsibility and accountability are maintained throughout the supply chain, especially during periods of stress.
• It recommends that banks review and validate the risks of "chaining" before engaging a second subcontractor.

7. Monitoring and Early Warning Systems

• BNP Paribas encourages CEBS to develop criteria for monitoring existing outsourcing deals.
• These criteria should help identify when an outsourcing contract is deteriorating or not meeting expectations.
• Banks and regulators should be able to alert supervisors when performance issues arise.

8. Retroactive Application of Principles

• BNP Paribas suggests that the principles in the consultation paper should not be applied retroactively to historical outsourcing deals.
• Existing contracts should only be subject to ongoing monitoring principles, not to a new authorization process.

9. Use of Basel Committee Guidance

• BNP Paribas supports the idea that banks should use the Basel Committee's guidance for risk analysis.
• It recommends that CEBS reference these documents to provide clarity for both banks and supervisors.

10. Risk Transfer and Operational Risk Management

• BNP Paribas urges CEBS to clarify how operational risk is transferred and managed through outsourcing.
• It recommends that CEBS provide examples of when operational risk is and is not outsourced.
• There is a need to determine whether outsourced processes are subject to the Basel Committee's operational risk capital adequacy framework.

11. Criteria for Authorization Refusal

• BNP Paribas suggests that supervisors should be clear on when they would refuse to authorize an outsourcing contract.
• Examples include outsourcing a large number of processes to a small, unauthorized, or inexperienced provider solely based on cost.

Conclusion

BNP Paribas supports a risk-based approach to outsourcing and emphasizes the importance of flexibility and transparency in regulatory oversight. The bank encourages CEBS to refine the consultation paper by providing clearer guidance on materiality, concentration risk, and the use of existing international frameworks. It also stresses the need for supervisors to focus on the quality and reliability of service providers rather than imposing blanket restrictions.