Central Bank of Malaysia issues exposure draft for its outsourcing framework

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.

Brian Chia
Brian Chia is the co-leader of Baker McKenzie's AP Insurance Group. He also heads the Corporate, Commercial & Securities Practice Group of Wong & Partners (Malaysia).
Sue Wan Wong is a Partner in the Corporate, Commercial & Securities Practice Group of Wong & Partners, the member firm of Baker & McKenzie International in Malaysia. Her practice includes advising on a suite of financial services regulatory matters, including on establishment of financial service providers, regulatory enquiries, marketing of financial products and financial services compliance. Sue Wan is also a member of the US-ASEAN Business Council (Financial Services Committee) and the Secretary of the FinTech Association of Malaysia.
Serene Kan is a senior associate in the Corporate, Commercial & Securities Practice Group of Wong & Partners. She has also advised clients on a range of issues relating to corporate commercial, competition, securities and real property law in Malaysia. Serene’s commercial contracting experience includes advising on contracts in relation to outsourcing, services distribution, technology licenses, marketing, product distribution and manufacturing. Her experience includes working on critical commercial contracts in the context of a strategic alliance, including on joint ventures.