On 28 September 2017, Bank Negara Malaysia (i.e. the Central Bank of Malaysia) (“BNM“) has issued an exposure draft of the Outsourcing Guidelines (“Exposure Draft“) to obtain public and industry feedback on the proposed regulatory requirements. The Exposure Draft sets out the requirements for licensed financial institutions when implementing, or renewing, any outsourcing arrangements.
In its announcement, BNM stated that the framework aims to “ensure that risk management practices for outsourcing arrangements remain effective” especially as the financial services sector continues to embrace technological advancement in a digitised environment.
While still in draft format, the regulatory requirements to be met before a financial institution can outsource any function have been made more stringent. These higher standards reflect BNM’s concerns that licensed financial institutions are reliant on service providers for activities that are critical to the overall viability of the licensed financial institution. BNM is seeking to deter financial institutions from outsourcing functions which the institutions should be in a position to implement i.e., without the aid of an external service provider.
Given the tenor of the Exposure Draft, licensed financial institutions should take the opportunity to review its existing outsourcing arrangements with the view of either transitioning such arrangements in-house, or otherwise consider the changes that it will need to make upon the policy document coming into force.
Financial institutions may want to exercise caution and deliberate if any arrangement should be outsourced. The decision will need to be balanced against the increased standards of governance and corresponding increase in cost for outsourcing. Thought will also have to be given on how such outsourcing arrangements should be “unwound” (if needed).
We outline and discuss some of the salient changes being proposed under the Exposure Draft in our recent client alert. Please feel free to leave us a comment if you have any further questions.