JFSC Issues Consultation Paper on Proposed Amended Outsourcing Policy

On July 18, 2016, the Jersey Financial Services Commission (JFSC or the Commission) issued consultation paper No.6 2016 on a Proposed Amended Outsourcing Policy (the Amended Policy). Under the Codes of Practice, it is a requirement for regulated firms to comply with the Commission’s policy on outsourcing.

Below we highlight the key changes included in the Amended Policy:

  • Clarification of the meaning of “material activities” which now includes both regulated and non-regulated activities
  • Definition of key terms and the scope of the policy
  • Removal of the distinction between “delegation” and “outsourcing” (in relation to Certified Funds and Fund Services Business)
  • Restructuring of some core principles
  • Guidance and FAQs are now included

The anticipated changes may ultimately require firms to make updates to policies and procedures as they related to outsourcing. Upon publication of the finalized policy, it would be prudent for firms to review their current arrangements and assess whether any new or historical service provider arrangements fall within or outside the scope of the Amended Policy. There is an expectation by the JFSC that all new outsourcing arrangements entered into will need to comply with the Amended Policy once published. Historical arrangements should be reviewed and updated as part of the ordinary course of business.

The consultation paper proposes that the Amended Policy will come into force two months after it is issued and it is anticipated that the finalized policy will be issued in late Q4 2016. Industry responses are being coordinated by Jersey Finance and are required by September 30, 2016.

Details of the main proposed changes are included below:

Amended Policy Reference Part 1, para 1.4 and Part 2

Scope of the amended outsourcing policy (para 4.2)

Description

  • The registered person remains fully responsible for outsourcing and sub-outsourcing arrangements
  • The Amended Policy specifies that the following activities are not considered to be outsourcing:

- Advisory services or other services which do not form part of Regulated Activity. This includes legal advice, training of personnel, billing services and the security of a Registered Person’s premises and personnel

- Purchase of standardized information services including market information services and price fees

- Performance of Material Activity by a branch on behalf of its parent (or vice-versa)

  • The Amended Outsourcing Policy expressly removes from its scope:

- MoME arrangements

- Situations where “reliance” is placed on third parties pursuant to Articles 16 or 16A of the Money Laundering Order

- Where there is a transfer of activity between a parent and branch where the parent and branch form a single legal entity

  • The appointment of Service Providers to a fund may be outside the scope of the policy if certain conditions are met (see below). This change is as a result of the removal of the distinction between delegation and Outsourcing in relation to Certified Funds and Funds Services Business
  • The definition of Material Activity has been extended to regulated and non-regulated activity (see below)

Considerations for regulated firms

  • Firms may need to review and update their policies and procedures on outsourcing to ensure that they reflect the revised scope of the policy
  • Firms will need to review their outsourced and delegated activities to ensure they are classified as in or outside of scope of the Amended Policy

Amended Policy Reference Part 1, Para 1.4.3

Removal of the distinction between “delegation” and “outsourcing” (para 4.3)

Description

  • In the original outsourcing policy, delegation was defined as a situation where a Registered Person does not provide a certain service and therefore makes arrangements with a service provider for those services. Given this distinction has caused much confusion, the Amended Policy removes the concept of “delegation”
  • The above situation is now addressed in the scope of the Amended Policy whereby, upon the establishment of a fund, the appointment by the fund of its Service Providers is not deemed to be outsourcing if their appointment is clearly disclosed to investors and to the Commission

Considerations for regulated firms

  • Firms may have arrangements that are no longer defined as delegation arrangements. This means that all outsourcing arrangements will be subject to the same policy
  • Fund managers and service providers may also need to review their arrangements to ensure that they make the appropriate disclosures as required by the Amended Policy
  • Policies and procedures should be updated where necessary

Amended Policy Reference Part 1, Para 1.4

Removal of the distinction between “delegation” and “outsourcing” (para 4.3)

Description

  • Outsourcing activity was previously described as the outsourcing of a registered person’s regulated function.  The JFSC highlights that regulated activity may be disrupted by non-regulated outsourced activity and therefore the definition of “material activity” now includes material regulated and non-regulated activity - For example, a registered person’s outsourced accounting functions and IT functions may be considered material if these activities are supporting the performance of regulated activities
  • The definition of material remains in line with the previous policy, however this is more clearly defined as Material Activity and encompasses “business activities which are, are part of, or are likely to have a material impact upon the carrying out of any Regulated Activity.” - This includes both material regulated and non-regulated activity
  • Some additional guidance on what core principal terms appropriate, adequate, suitable and effective mean is included in the FAQs which have been added to the Amended Policy. The FAQs effectively state that a firm must apply its own judgement except for in the cases where the Commission provides specific guidance as to what it would consider appropriate, adequate, suitable or effective

Considerations for regulated firms

  • Firms should take the opportunity to assess their approach to determining the materiality of outsourced arrangements based on each individual case to ensure that they are comfortable they will meet the requirements of the Amended Policy
  • Senior management and compliance may need to review all arrangements with service providers to determine whether these might now be captured by the policy - For instance, a firm outsourcing accounting services for a large fund portfolio may now be considered to be a Material Activity under the new policy if it is relevant in determining whether a Regulated Activity is being performed properly
  • The JFSC should be notified should any outsourcing arrangement meet the definition of Material Activities - Communication must be received by the Commission before entering into a new outsourcing arrangement
  • Firms should ensure that compliance monitoring programmes are reviewed and revised for changes to the Outsourcing policy

Amended Policy Reference Part 3

Changes to wording of Core Principles (Para 4.5)

Description

Minor adjustments have been made to the wording of the core principles in order to provide further clarification. The principles broadly remain the same. Core Principles No. 5 and 6 see the most significant changes:

  • The new Core Principle No.5 states that the Commission now needs to be provided with “adequate prior written notice” of its intention to outsource and a firm must now not enter into an outsourcing arrangement until it has received prior written confirmation (no objection) from an officer of the Commission
  • The new Core Principle No.6 has been simplified to state that regulated firms must ensure that nothing in the outsourcing arrangements prevents the Commission’s ability to exercise its legal or regulatory powers - FAQ 6.7 provides an example whereby financial records or other information which the Commission might need to obtain in order to exercise its supervisory or enforcement powers is transferred to a jurisdiction with secrecy laws

Considerations for regulated firms

  • Firms will need to review their procedures to clarify that no outsourcing arrangement is entered into until consent is received from the Commission
  • In addition to ensuring compliance with relevant data protection regulations, a firm must take into consideration local secrecy laws and how/where records are maintained by service providers and whether these will be accessible by the firm and the Commission.

Amended Policy Reference Part V: FAQs

Introduction of FAQs (para 4.6)

Description

The Amended Policy includes FAQs which provide more practical explanation and examples of how the Amended Policy will be applied. These are split into General Issues (part 5), Particular Core Principles (part 6) and Particular Types of Activity (part 7). For example, FAQ 5.5 notes that the governing body is ultimately responsible for the management and conduct of firm’s affairs. The JFSC would expect to see minutes evidencing that senior management have carefully considered outsourcing arrangements.

Considerations from regulated firms

Firms should ensure that senior management have oversight of outsourcing arrangements and policies and procedures should be reviewed and approved by the Board on a periodic basis. Minutes should clearly document that the Board has carefully considered the nature of the arrangements and that they receive MI and KPIs on outsourcing arrangements.

Amended Policy Reference Part 4, para 4.2.3

Guidance on Intra-group Outsourcing (para 4.7)

Description

Further guidance on intra-group outsourcing is provided in FAQ 7.2 of the Amended Policy.

  • Amendments have been made to allow reliance on entities within the same group in respect of shared due diligence, monitoring, policy, procedures or contingency plans. FAQ 7.2 states that reliance can only be placed where the firm complies with legal and regulatory requirements, it is in the best interests of clients and it does not give rise to any undue risks
  • Firms must comply with Principle 3 of the Codes of Practice and are required to adequately monitor and control the business. Proper corporate governance mechanisms must be implemented by firms to ensure that such business is adequately monitored and controlled and the firm must be able to evidence these arrangements
  • The Commission also recognizes that appropriate written outsourcing agreements might take the form of framework agreements or service level agreements in respect of intra-group outsourcing. The arrangement, however, must not be put in place in an attempt to circumvent the requirements of the outsourcing policy.

Considerations from regulated firms

  • Firms are required to assess whether intra-group arrangements give rise to any undue risks or whether it is in the best interests of the client
  • Furthermore, there must be appropriate internal agreements in place and the firm must ensure that it is comfortable that it is in compliance with relevant regulatory requirements

Amended Policy Reference Part 4, para 4.5

Guidance on Outsourcing Notification Information Requirements and Timeframe (para 4.8)

Description

Notification requirements are clarified under Core Principle No. 5. Paragraph 4.5.4 includes specific information that should be included in an outsourcing notification. Upon receipt of the notification, the JFSC will endeavor to respond within 20 business days and may require a firm to take further action before communicating a no objection.

Considerations for regulated firms

  • Firms should ensure policies and procedures are appropriately updated. A firm cannot enter into a new outsourcing arrangement without a communication of no objection from the Commission.

How Duff & Phelps Can Help

The above proposed changes may require firms to update policies and procedures. Outsourcing arrangements should also be reviewed to ensure that they comply with the new Amended policy once it comes into force and compliance monitoring programs may also require review to be in line with the new requirements. 

Our experienced Compliance and Regulatory Consulting team, based in the Channel Islands and globally, can assist your firm with meeting the JFSC’s regulatory standards through:

  • Policies and procedures development
  • Compliance monitoring
  • Compliance infrastructure advisory
  • Compliance and regulatory secondments to assist with temporary resource gaps
  • Review of governance arrangements and senior management arrangements
  • Thematic compliance reviews
  • Annual and ongoing reviews of compliance arrangements, systems and controls
  • Staff training on regulatory matters
  • Mock regulatory audits, pre-enforcement and supervisory reviews
  • Support with on-site regulator visits, examinations and enforcement investigations
  • Advice on preparing for regulatory changes
  • Regulatory update notifications
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