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Simon Collins: What the FCA has to say about outsourcing

Simon Collins

Many businesses use and rely on the services provided by third parties. But while FCA-regulated firms are able to outsource a number of different activities they remain accountable in the  vent something goes wrong.

With this in mind, it is imperative a firm conducts thorough due diligence on any service being outsourced, whether it be a regulated activity or not. Those in charge must assure themselves that the service being provided does not compromise the firm’s ability to ensure fair treatment  of customers.

The regulator’s guidance on outsourcing makes it clear a firm is expected to take reasonable care to supervise outsourced functions.

Therefore, as part of the due diligence process, firms must consider the financial stability of the service provider, the reporting structures in place and how the arrangement will fit with their governance and general organisation.

This is important even where the customer is engaging directly with the third party, as they will view it as an extension of their relationship with you. Be cognisant of the potential reputational  damage in the event something goes wrong.

So, what should you think about when engaging a third party? The following list is a useful guide and can also be used against any current relationships you have:

  • Is the basis of the arrangement clearly defined within the service level agreement?
  • Has the management information required from a third party been defined and agreed?
  • What onsite monitoring activity will be conducted?
  • What monitoring activity will be conducted by the outsourcer?
  • Does the third party firm have the right culture? Does it align with yours?
  • Where the third party is dealing with customers, are appropriate controls in place?
  • Does the third party take its data protection responsibilities seriously?
  • What disaster recovery arrangements are in place?
  • Is there a clear exit strategy for if/when the relationship comes to an end?

Case study

In an ideal world, customers will have a positive experience every time they use a financial services firm. However, things do not run smoothly all the time and incidents can happen that cause a customer to complain.

As a firm, how you handle complaints not only determines your future relationship with the customer but also indicates what your culture and approach is towards treating customers fairly.

Complaints handling is one area that is often outsourced. How can you ensure your customers are being treated correctly and the handling of their complaint is appropriate?

The FCA has identified areas firms should be aware of when assessing the appropriateness of their complaints handling procedures. You should bear the following in mind when choosing an outsourced provider:

  • Is the complaints process accessible for all customers (for example, are premium telephone numbers used? Are the opening hours restricted? Are considerations made for vulnerable customers?)
  • Is the redress offered consistent across the customer base?
  • Do staff understand what constitutes a complaint?
  • Is the third party complying with all the relevant regulatory requirements?

A firm that outsources this service may feel some of these areas are out of their control. However, as you retain the responsibility for how your customers are treated, the FCA will expect you to have conducted thorough and ongoing due diligence.

There are key pieces of management information you should be requesting to help you make a judgement on the competency and appropriateness of  a service provider: for example, time taken to respond to complainant, process for escalation, training and understanding of the complaint, redress offered and tone of communications.

This information will help you determine whether the service provided is appropriate but you should also use it to conduct root cause analysis to understand the reasons behind a complaint and whether your own processes need to change.

You should also consider engaging directly with your customers that have been through the outsourced complaints process to understand their experience.

Why is this important? As the FCA has said before, complaints matter and how a firm approaches one is indicative of its culture and attitude to its regulatory obligations to treat customers fairly.

Simon Collins is
 managing director, regulatory, at Eversheds Consulting

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Outsourcing investments has to be one of the biggest conns in financial services. Someone else does the work and (rightly) charges for it. The adviser holds the client’s hand, looks pretty and charges a funds under management fee. What management?

    It just goes to show that there is no shortage of mugs on which this industry can prey. Would any of you buy into the service? I know that I jolly well wouldn’t.

  2. @Harry Katz so do you think a sole IFA should spend the millions it takes to perform proper research into what is appropriate; fast money; alternatives, traded volatilities etc.? Surely it is about Planning incl cash flow, tax and retirement income? Are you looking at ancient adviser commission propositions?

  3. peter mulholland 5th March 2016 at 10:50 am

    Most FA’s are just hand holding the client by assigning fund management to unit trusts etf’s and investment trusts. It is all made complex but in the end few beat the uk index and you wonder is there any point? Other than what the heck it pays the bills- thank God for the high level of financial illiteracy and ego’s of the clients.

  4. Never used any outsourcing and never would as I am still liable for someone else’s business related performance and structure. Why would I pay someone else to do this job and charge their fees only for me to carry the can if it goes pear shaped? Doesn’t make sense for me to do. Probably because the huge majority of my clients have simple needs that can be met with simple products (ISA, UT, bonds or Pension). From my client-base point of view, they are really only trying to get a better rate of return than any deposit rate can give of over a 5 to 10 year period. If their investments do this, they are very happy.
    There will be IFA businesses who have much more complex clients with more sophisticated needs but if you are going to have to carry the can in the even of a complaint why rely on someone else to do their job? You may as well do the job to the best of your own ability in doing the best for your client if and carry the can

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