Huntswood believes many of the outsourcing contracts in place, worth an estimated £1.1 billion in 2004, will not comply with these guidelines, exposing firms to the risk of regulatory censure or fine.
The two pages of outsourcing guidelines form part of the FSA’s Integrated Prudential Sourcebook (PRU), which took effect for insurance firms (including Lloyds agents and the Society itself) on 31st December. For other regulated financial services firms, a rules-based outsourcing system is expected from the EU as early as 2006. However, Huntswood believes many firms will have overlooked this mounting outsourcing risk, due to the wide range of other risk management requirements within PRU.
Mark Lanham of Huntswood Consulting commented: "The FSA and EU focus is on reducing risk to consumers by increasing the onus on firms to select and monitor their outsourcing arrangements carefully. This is also an ideal chance to review existing outsourcing contracts, ensuring they still reflect long-term objectives and are being adhered to. 85% of contracts signed since 2001 will be renegotiated within three years of signing, because they no longer reflect firms’ long-term objectives."
Huntswood Consulting sets out five phases firms should include when auditing their outsourcing arrangements:
1) Analysis & planning: strategy and risk assessment; outsourcing model design;
2) Supplier selection: evaluation of the selection process;
3) Transition: contract negotiation and transition management;
4) Delivery of services: performance management; governance & controls and relationship management;
5) Decommission: termination of contract and exit strategy.
To help firms assess any risks and enhance the performance of their outsourcing arrangements throughout these five phases, Huntswood Consulting has launched an operational audit service.
Lanham continued, “Because of Huntswood’s unique position as both compliance specialist and leading outsourcing provider to the financial services industry, we’re best able to audit the whole spectrum of outsourced arrangements, from customer services to back-office processing to complaint handling, highlighting where firms could enhance benefits to their bottom line, while reducing regulatory risk.”
