Financial Services Outsourcing & Risk Regulation

Financial Services Outsourcing & Risk Regulation

The digital explosion along with new and disruptive business models is challenging the regulatory market. Financial organisations are facing greater scrutiny in light of recent reports and revisions concerning risk and compliance. Today, the sheer range of outsourcing solutions that offer greater efficiencies to organisations and customers are perceived by regulatory bodies in terms of potential risks.


  • In November 2018, The Central Bank of Ireland (CBI) published a report on outsourcing focused on the management of outsourcing and key risks.
  • In February 2019, The European Banking Authority (EBA) revised their guidelines, which came into effect on the 30th September 2019. Specific provisions for financial institutions’ governance frameworks are laid out. They relate to their outsourcing arrangements and the associated supervisory expectations and processes.
  • In June 2019, The Irish Minister for Finance, Paschal Donohoe, agreed to introduce new legislation after the Central Bank proposed a Senior Executive Accountability Regime. For the first time, this will hold both firms and senior individuals within them accountable for misconduct.

How will financial institutions manage these changes?

Banks and financial companies will need to master what’s likely to be an ongoing influx of regulatory changes, however, there’s a great burden associated with implementing these requirements. Business models may need to be restructured to cope with the pressures. In turn, such changes will warrant new business functions, redefined roles, and skilled teams who know how to strategically implement and manage these changes.

And the burden on financial institutions imposed by GDPR will grow as digi­tal channels evolve and accelerate. This will demand comprehensive, agile measures, effective project management and process optimisation to safeguard expanding volumes of customer data. Another focus area for European banks is effective resolution planning. Resolution, a precautionary and defence strategy, is under the regulatory spotlight to make banks safer, less likely to collapse, and to protect client assets.


Digital Innovation offers great opportunities and great risks

Sophisticated customer interface tools and customer relationship management (CRM) systems make it easier for financial organisations like banks and insurance companies to respond to their customers, analyse consumer behaviour via social media, automate internal processes and continually improve their customers’ digital experience.

The use of outsourcing to implement process and CX technologies can deliver significant rewards to financial organisations – empowering them beyond the benefits of cost reduction. Process transformation and enhanced customer experiences can be amplified across business units and geographies that subsequently drive greater revenue opportunities.

Likewise, digital innovation and the channels used to deliver financial services presents new threats that stretch beyond the current regulatory scope, hence the attention of regulatory authorities.

The probability of opportunity versus risk fluctuates depending on a company’s market interests, and the type and purpose of deployment. Therefore, a uniform approach is not a safeguard for managing risk, but rather, organisations may consider their risk appetite framework – and develop an approach that aligns with that. This means looking at the entire scope of data processing and management, and how these systems can be improved and integrated.


So, what are the key risk areas with outsourcing?

Data Security – Handling consumers’ personal information comes with a high obligation to protect data against mishandling or misuse. A 2018 report titled Verizon Data Breach Investigations highlights the most common data breaches;

  • 48% featured hacking
  • 30% included Malware
  • 17% had errors as causal events
  • 17% were social attacks
  • 12% involved privilege misuse
  • 11% involved physical actions

Consumers put their trust in the hands of banks, insurers, mortgage providers and other financial organisations. Rightly so, they expect these organisations to protect their personal data, making both confidentiality and security high priorities. Consumers expect organisations to have robust security systems against hacking, and astringent protocols against all types of personal data breaches.

Business Continuity – Disruptions such as accidents, disasters and strikes can interrupt business information systems and cause delays, data problems and loss of revenue. Understanding where these risks could occur can help with developing contingency plans to respond efficiently should such an event happen. The Central Bank of Ireland (CBI) has advised companies to consider their exit strategies and be in a position to transfer outsourced services in-house if required, including determining a timeframe for the transfer.


A Digitalization Strategy

More financial institutions are thinking about integrated digital platform strategies to centralise data storage while offering a comprehensive overview of all banking data, which would allow them to:

  • use a proactive approach to transform the risk function with better detection of new and emerging risks.
  • manage data in an efficient, structured way and improve security
  • gain effective compliance control within the shifting regulatory landscape
  • use data analytics to guide internal decisions, client services and commercial opportunities
  • enhance the decision-making process together with their executive team


Reliability in Outsourcing

When outsourcing to a third-party, understanding how the provider will store and handle sensitive information pertaining to the company, employees, products and pricing is an important step towards preventing risks. This includes gaining a clear understanding of the outsourcing provider’s technology, systems and processes, and the exchange and management of information.

Seeking the help of experts with business-focused, quality-oriented competences can offer the dedicated support needed for staffing and managing large projects, enhancing operational efficiencies and optimising results.

For more on the topic of Outsourcing read – 7 Steps to Successful Outsourcing Partnerships.