FIs' outsourcing arrangements

The State Bank is keeping a close watch on all aspects of banking business to protect clients and ensure the solvency of financial institutions. According to a circular issued on 20th June, 2017, the SBP revised the "Guidelines on Outsourcing Arrangements" to enable the banks/DFIs to effectively manage the potential risks associated with outsourcing arrangements. The new framework was based on international standards and best practices on the subject and aims to enhance the proactive environment in the financial institutions on various aspects of the outsourcing, including (but not limited) to governance, risk management, services, group outsourcing, outsourcing of foreign branches of banks, information technology outsourcing and collaboration/outsourcing arrangements by FIs with Fintechs (Financial Technologies). The framework also encompasses the list of critical functions/activities that cannot be performed by employees of 3rd party service providers. Besides, the FIs, while deciding to outsource any function, activity or process, will ensure that outsourcing does not affect the protection available to depositors or investors under the existing legal framework. The FIs will also be required to ensure that the same is not used to avoid compliance with the regulatory requirements. Existing outsourcing arrangements should be aligned with the new framework by 30th June, 2018.
It is a well-established fact that well-structured, sound and efficient financial institutions are usually well positioned to pool and mobilise higher levels of savings from a large number of depositors and allocate these savings among entrepreneurs for most productive uses in economy. While such a function was more simple and straightforward a few decades ago, the system has now become more complex and innovative with the growth in new technologies, fresh products and information revolution. There are now functions within banks which could be outsourced to save costs and introduce state of the art products and services. In fact, the banks are now competing within themselves to attract more and more customers by offering more convenience and a broader range of services to the public at large. Since all of this cannot be done by the existing staff at the disposal of banks, it is easier and relatively cheaper to take recourse to outside sources and avail their services. However, such a recourse has its own risks and the new guidelines were issued in view of the increasing use of outsourcing of services by banks/DFIs and potential impact of associated risks and obligations to customers. State Bank of Pakistan had earlier introduced the Guidelines on Outsourcing Arrangements for banks/DFIs in 2007 but these were probably not considered adequate to take care of the latest trends. State Bank has, nonetheless, instructed that critical functions/activities of the banks/DFIs cannot be performed by employees of 3rd party service providers. This was in the fitness of things because, otherwise, a financial institution, facing high risk, could absolve itself and put the blame on service provider. This clause has been further strengthened by ensuring that available protection to depositors will not be affected, existing legal framework will remain applicable and compliance with the regulatory requirements will not be avoided. Hopefully, the new framework will serve to effectively manage the potential risks associated with outsourcing arrangements, and maintain the confidence of clients in the vibrancy and solvency of banking system without adversely affecting the innovative spirit of the FIs.