Draft Prudential Standard on Outsourcing - November 2001
Draft Guidance Note on Outsourcing - November 2001

Reflecting the growing importance of outsourcing in the financial sector, the Australian Prudential Regulation Authority (APRA) today released for comment a draft Prudential Standard on outsourcing by authorised deposit-taking institutions (ADIs). The draft Standard aims to ensure that the Board and management of ADIs have policies and procedures to manage effectively the risks arising from outsourcing business activities. Where an activity is outsourced, an ADI retains responsibility for ensuring that all associated risks are managed and monitored as they would be if the activity was performed in-house.

The main features of the proposed Standard are:

• It will apply only to the outsourcing of "material" business activities. This refers to those activities which, if disrupted, have the potential to impair significantly the ADIs business operations, reputation or profitability.
  
  
• ADIs are required to notify APRA of outsourcing arrangements involving material business activities prior to entering into the arrangement. This will enable APRA to assess the likely impact of the arrangement on the ADI and to assure itself that appropriate due diligence has been done and that the risks are being appropriately managed.

• ADIs will be required to insert a clause in all material outsourcing agreements giving APRA access to documentation in relation to the arrangement and the right to conduct on-site visits to the service provider should APRA wish to do so for prudential supervision reasons.

• Under the proposed transition arrangements, ADIs will be required to notify APRA of all material outsourcing agreements in existence at the time the Standard comes into effect but do not need to meet the requirements of the Standard until the agreements are renewed.

While the Standard will initially apply only to ADIs, APRA encourages all regulated institutions to adopt the principles set out in the Standard when entering into outsourcing arrangements. It is intended that similar Standards will be introduced for all regulated institutions when the opportunity arises.

The Prudential Standard on Risk Management for General Insurers includes a Guidance Note covering outsourcing. While this is less comprehensive than the draft ADI Standard, APRA has decided not to make revisions at this stage given that industry consultation on the General Insurance Standards has only recently been completed.

Outsourcing is also a significant issue for the superannuation industry and the introduction of a Standard on outsourcing will be a high priority when the relevant legislation is amended to allow it. The Standard is seen as complementary to the specific requirements of the Superannuation Industry Supervision (SIS) Act with regard to the use of third parties (such as investment managers and custodians) and the regulations imposed on Approved Superannuation Trustees under their Instruments of Approval.

APRA also proposes to explore with Government the need for specific legislation to allow APRA to obtain information directly from third-party service providers. This power, which would extend to third parties providing services to any APRA-regulated institution, will enable APRA to obtain the information it requires in a timely manner. This legislation would be used only where APRA is unable to obtain the information directly from the regulated institution or on a voluntary basis from the third party.

Comments on the draft Standard are invited by 18 January 2002. In view of the intention to apply it to all regulated institutions in due course, APRA would welcome comments from all regulated industry sectors. A copy of the draft Standard can be found on the APRA website.

Comments on the draft Standard can be made to outsourcing@apra.gov.au or to:

Graham Johnson

General Manager (Consulting Services)
Policy, Research and Consulting
Australian Prudential Regulation Authority
GPO Box 9836
Sydney NSW 2001

For more information contact:

Gloria Peterson Public Affairs Manager 02 9210 3385 or 0419 250 286