Outsourcing Panel: Fund Board Oversight

Outsourcing Panel: Fund Board Oversight

Information Classification: Limited Access

To help the asset management

community understand recent

regulatory developments in

outsourcing governance and share

best practices in fund board oversight,

risk management and resiliency,

we convened a panel of industry

experts on investment outsourcing

operations. The panel consisted of:

• Akbar Sheriff, Regional Head of Product Management & Innovation and Chair of Irish Legal Entity providing Fund Administration Services;

• Brendan O’Regan, Head of Business Governance and Outsourcing Oversight based in Ireland;

• Anna-Marie Jupp, Head of EMEA Outsourcing Office and

• Yenni Leighton, Product Strategy & Regulatory Intelligence EMEA Lead.

Navigating Outsourcing Governance

2Information Classification: Limited Access

Outsourcing is a critical focus for regulators, however nuances complicate the context

Governance of outsourcing arrangements

evolved over the last decade, largely driven

by market conditions and global events.

This led regulators, financial institutions and

fund boards to increase their scrutiny and

enhance outsourcing oversight. Even though

regulators cover broadly the same outsourcing

themes - strong internal process and robust

contractual arrangements, there are few

variations in Europe and internationally.

Luxembourg’s legislative policy Commission

de Surveillance du Secteur Financier (CSSF)

Circular 12/552 as amended focusses on

register and inventory, risk assessment,

monitoring and exit plans. The Central Bank

of Ireland (CBI) laid emphasis on board

awareness, risk management, business

continuity and resiliency. UK Prudential

Regulatory Authority (PRA) proposed upgraded

guidelines on outsourcing and third-party

risk management, which is heavily focused

upon resiliency. In May, the International

Organization of Securities Commissions

(IOSCO) introduced seven Principles of

Outsourcing Governance that lean towards

cloud outsourcing and resiliency. UK PRA

and IOSCO consultations closed in October.

The European Banking Authority (EBA) has

outsourcing of critical functions of investment

firms or credit institutions subject to Capital

Requirements Directive V that entered, reviewed

or amended their outsourced arrangement.

At its core, EBA guidelines include concentration,

aggregated risk and line of sight to monitor

contractual parties in the outsourcing chain.

The Guidelines are in force.

Leighton: Akbar, as Chair of State Street’s Irish

legal entity, you are in discussions with senior

leaders and board members, what is top of

mind for the C-suite?

Sheriff: Outsourcing is not new. There has

been a natural evolution from where we were

five years ago when there was a narrower focus.

Focus today tends to be broad: “how well do you

know your service provider?”, “how do you get

comfortable that you have the right business

oversight over your outsourcing provider?”.

Further, there is a much greater focus on

accountability. The Senior Manager Regime

(SMR), which now covers asset managers, links

personal liability to failures in governance.

The CBI is heading the same way. Finally, EBA

guidelines continue to raise the bar, but also

leave variability in execution.

Within this context, Legal Entity and Fund

Boards have come under increased scrutiny.

Board composition and governance practices

are an acute focus – the question we frequently

get asked: ‘how do we get comfortable that we

have the right representation and expertise to

understand and manage entity risk related to

outsourcing and IT?’


In this environment, many fund managers

C-Suites are increasingly challenged.

For example, a mid-sized multi-jurisdictional

firm, based in the US with passive funds or

Irish UCITS, may see impact on their business

models, their economics and find it difficult to

navigate the nuances by jurisdiction. This would

result in re-trenching to the core or M&A activity.

Ultimately, the conversation is about balancing

your obligation with your stakeholders while

maintaining the strength of the business.

Sheriff: Brendan, you face off to Irish legal

entity boards and the industry, how are peers

thinking about it operationally and practically?

O’Regan: I present at these board meetings.

In the last 18 months there has been a noticeable

shift in the type of reporting directors and clients

request for due diligence meetings. It is clear

regulators are putting an onus on boards and

directors to demonstrate full ownership and

the responsibility to challenge service providers

on their outsourcing and reporting. Regulators

want more granularity from clients and fund

directors by evidencing via a “look through”

of the fund administrator’ service provider’s

outsourcing footprint, delegation chain and

related governance models. Directors must

be able to have a clear understanding of for

instance, what is outsourced and where, and

how oversight is completed throughout the

outsourcing lifecycle – from selection to exit

strategy, should this arise. Fund Boards want

more details related to the on-going oversight

of service providers, to know about the challenges,

issues and how we are addressing these.

The details are essential to that responsibility.

Leighton: While each firm is unique, when

you engage at an industry level, you see

commonalities. What are the challenges

the industry faces Anna-Marie and

problems that need industry solution?

Jupp: I have sat on many panels on PRA

consultations and EBA guidelines. Our main

areas of challenge industry-wide are concentration

and aggregated risk. This requires building

an appropriate methodology to assess, monitor

and inform decision making or strategic

considerations. This creates a further challenge

in an increasingly cost pressured environment.

If concentration exists, the resiliency then

becomes critical in being robustly monitored

and managed. The PRA wishes to have firms

report on their vendor services to assess

market wide concentration, how this will be

implemented by the PRA is subject to questions

relating to confidential strategy and data concerns.

The challenge may be with vendors not under

their regulatory regime and how the PRA can

influence their resiliency to protect the market.

“Oversight and resilience are core to business strategy. Ultimately, its about balancing your obligation with your stakeholders while maintaining the strength of the business.”

— AKBAR SHERIFF


Fourth party and beyond ongoing monitoring

governance has proved problematic, where

one party has the contractual relationship

as a third party. Yet the EBA requirements

extends beyond this relationship, it requires

a fine balance between legal, contractual

agreements and reporting. There are many

potential layers and a certain level of maturity

development between contracting entities

providing sufficient line of sight to evidence

service delivery and any related risk.

There are widespread concerns that individual

regulators in each jurisdiction may add further

guidance but be contrary to one another.

For global entities this will be a real challenge

to balance appropriately.

Leighton: Are these the same challenges in

Ireland, Brendan? What are the industry steps

to navigate?

O’Regan: Challenges are common across our

peers in Ireland. Oversight models tend to be

heavily weighted towards First Line of Defense

(FLOD). The CBI wants all areas to be engaged

from Board down through to governance forums

and specifically across the three LOD with

clearly defined roles and how outsourcing

fits into the overall risk framework of the firm.

Local Boards should have a segregation model

where independent decisions are made to

demonstrate they are not unduly influenced

by the parent organisation.

The CBI was helping shape the EBA guidelines;

resulting in similar standards, now expected

across the region. Regional and local regulations

broadly aligned across EMEA; CBI being first

mover, EBA has caught up. The industry is

responding locally through engagement, formally

and informally via industry associations such as

Irish Funds, to share best practice. At State Street,

we are sharing information with our other legal

entities Germany, Luxembourg, the UK, to

name a few.

Leighton: This is a challenging environment

for asset owners/managers. When with

clients, Anna-Marie how do you suggest

oversight is managed?

Jupp: Clients should be discussing with

their provider Relationship Manager’s their

footprint and services and considering service

reporting that encompasses the breadth of

service sufficiently, and with proportionality

to their critical risks. It is reasonable for clients

to consider how the reporting can be analysed

and can provide valuable insights driving

active oversight with suitable outcomes.

“Regulators want more granularity, directors want a better understanding of their outsourcing lifecycle and Fund Boards, line of sight on challenges and issues being addressed.”

— BRENDAN O’REGAN


Leighton: Amongst your peers Akbar,

what practical solutions and best practices

are there? How are clients responding to

drive decisions?

Sheriff: As one of our client’s articulates‘

more here is not always better; the secret

sauce we need is a level of information that

gets me to the right level of accountability,

while driving insight with a practical outcome?”

There is no silver bullet here, however,

the C-suite is reacting in a few ways:

• Oversight and resilience have become core

to Business Strategy versus a consideration

for the strategy, or a supplementary effort.

This is not dissimilar to the ESG space

where increasing regulatory and business

integration means that ‘sustainable investing’

is being replaced by just ‘investing’.

• Business models are being challenged.

Going back to the earlier example of

the mid-sized firm with Irish UCITS,

where substance and further oversight

may drive M&A or exit.

• Focus on practicality. Given potential

information overload and jurisdictional

nuances, CROs and COOs focused

on how to exhibit insight driving

outcomes in their oversight models.

• War on talent has intensified. Strong

technology savvy and insight driven

oversight managers are rare and in

high demand.

Leighton: It wouldn’t be right to have

a meeting without mentioning COVID-19.

What does this mean for resiliency,

Anna-Marie?

Jupp: The main area for the industry has

been the inability to deliver on-site inspections

in a virtual environment. This does not mean

due diligence is not covered, the process

is different. While using different methods,

outsourcing service providers need to ensure

there are suitable approaches to perform

a comprehensive review.

Leighton: In your opinion Akbar, what is

the new normal and future for outsourcing?

To what extent will technology innovation

play a part?

Sheriff: Outsourcing will continue to evolve

as part of broader resiliency agenda which

increasingly incorporates technology risk.

Elements such as 4th party oversight will remain

industry-wide challenges. Visibility and tools

to enable such will increase; automation will

be critical. Evolution of digital assets will add

further complexity.

Client questions are in themselves very

different and even if similar, the context

for each client is different. This requires

a more granular and contextualized

conversation with you.


7

Akbar SheriffChair of Irish Legal Entity and

Regional Head of Product

Management & Innovation

Anna-Marie JuppHead of EMEA Outsourcing Office

Brendan O’Regan Head of Business Governance and

Outsourcing Oversight based in Ireland

Yenni Leighton Product Strategy and Regulatory

Intelligence, EMEA Lead

Outsourcing Governance Panel

“We know that Outsourcing Governance is important to you. If you have questions, we encourage you to engage with us through your Client Relationship Manager, so we can have a conversation with your Boards and team on the industry’s actions as well as our own.”


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Outsourcing Panel: Fund Board Oversight