Reflecting the growing importance of outsourcing in the financial services industry, the Australian Prudential Regulation Authority (APRA) today released a new Prudential Standard on Outsourcing by Authorised Deposit-Taking Institutions (ADIs).

The new Standard becomes effective on 1 July 2002.

"The Standard sets best practice principles to ensure that the Board and management of ADIs have policies and procedures to manage effectively the risks arising from outsourcing material business activities," said Mr Graeme Thompson, CEO of APRA.

"Each ADI Board must satisfy itself and APRA that it has identified and can prudently manage any risk that may materially affect the continued safety of depositors funds," Mr Thompson said.

The Standard provides for APRA access to service providers, including the ability to conduct on-site visits.

The revised Standard makes it clear that this involvement with the service providers is directed solely at obtaining the information APRA considers is necessary in its role as prudential supervisor of the ADIs.

"Outsourcing arrangements can actually reduce risk - however it is important that the regulator be able to satisfy depositors that all arrangements have had associated risks identified and mitigated," said Mr Thompson.

APRA released a draft of the Standard for comment in November 2001. While the Standard is applicable only to ADIs, APRA sought comment from all APRA-regulated industry sectors.

"While there has been criticism from some sectors, notably Information Technology, it must be remembered that a clear Standard gives confidence and creates a stronger and safer financial system. If there is material risk then clear guidelines are in the interests of good corporate governance," said Mr Thompson.

APRA is also seeking extra powers to ensure that it is able to obtain in a timely manner where this is considered necessary, information from service providers. This is especially important where a third party is providing services to a large number of regulated institutions.

APRA has obtained information from third parties providing services to regulated institutions on a voluntary basis for some time. New powers would be used only where voluntary cooperation was not forthcoming.

As outsourcing is a common activity across all industry sectors, APRA intends to introduce similar standards for all regulated institutions. In particular, APRA will be considering further how best to strengthen the supervision of outsourcing in the superannuation sector.

The new Standard replaces the following Preserved Transition Prudential Standards for building societies, credit unions and special service providers:

Prudential Note 3.4E;
Prudential Standard 3.4.5;
Prudential Note 4.4D;
Prudential Standard 4.4.4;
Prudential Note 5.4H;
Prudential Standard 5.4.8; and
Subsections 245(1)-(3) of the Financial Institutions Code.

A copy of the Standard and guidance note can be found on the APRA website at www.apra.gov.au.

For further information:	Media Enquiries only:
APRA Call Centre	David Van
1300 131 060	APRA - Public Affairs
	02 9210 3143
	0418 649 474

• For the purpose of this Standard, outsourcing involves an ADI entering into an agreement with another party (including a related company) to perform a business activity which currently is, or could be, undertaken by the ADI itself.

• The Standard applies to all ADIs regardless of whether activities are outsourced to related or third party entities. For example, the Standard applies to outsourcing to a related company within a conglomerate group. However, APRA will be flexible where the service provider is a supervised member of the group.

• The Standard also applies to arrangements where the service provider is located outside Australia  or the functions are performed outside Australia.

• The Standard is only applicable where the outsourcing arrangement involves business activities that are material in nature. Generally, a material business activity is defined as one that has the potential, if disrupted, to impact significantly on the ADIs business operations, reputation or profitability.

• The Standard makes it clear that material outsourcing arrangements do not include contractor type relationships or situations where there are numerous providers of the services, the contract is relatively short term, and where the cost and inconvenience of switching between providers is low. ADIs are encouraged to consult with APRA where they are uncertain as to whether an outsourcing arrangement needs to comply with the Standard;

• ADIs are required to notify APRA as soon as possible after entering into outsourcing agreements, and no later than 30 days after executing the contract;

• At the time the Standard comes into effect ADIs should notify APRA of all existing outsourcing agreements involving material business activities. However, these agreements do not need to be covered by the requirements of this Standard until such time as the agreement is due for renewal.

• The Board and senior management of an ADI should ensure that the risk management policies of the ADI include a formal policy covering outsourcing arrangements. The Board or responsible committee should be actively involved in assessing the processes involved in outsourcing all material business activities.

• ADIs should develop a policy document that sets out its approach to outsourcing, including a detailed framework for managing outsourcing arrangements.

• The outsourcing agreement should include a clause giving APRA access to documentation related to the outsourcing arrangement and the right to conduct on-site visits to the service provider if APRA considers this necessary in its role as prudential supervisor of the regulated institution(s).

• APRA will initially seek to obtain from the ADI the information it requires in relation to the outsourcing arrangement. Any material requested under the Standard would be limited to information that APRA considers necessary to obtain in its role as prudential supervisor of the regulated institution.

• The ADI should devote sufficient resources to managing and monitoring the outsourcing relationship. The type and extent of resources required would depend on the materiality of the contract.

• The ADI should advise APRA of any significant problems that are being encountered which have the potential to materially affect the outsourcing arrangement.

• Where considered appropriate, APRA may request the external auditor of the ADI or an appropriate external expert to provide an assessment of the risk management processes in place with respect to the outsourcing arrangement.

• The new Standard becomes effective on 1 July 2002. The new Standard replaces the following Preserved Transition Prudential Standards for building societies, credit unions and special service providers:

A copy of the Standard and guidance note can be found on the APRA website at www.apra.gov.au.

For further information:	Media Enquiries only:
APRA Call Centre	David Van
1300 131 060	APRA - Public Affairs
	02 9210 3143
	0418 649 474