FSA
FSA
In December 2012 the FSA issued a "Dear CEO" letter to all asset management companies entitled “Review of Outsourcing Arrangements in the Asset Management Sector”. The FSA was concerened that much of the investment industry has outsourced operational activities which are considered “critical or important”. There are a limited number of third party administration companies (TPAs) offering such outsourced services, most of which are part of large banking groups with balance sheet exposure to other banking activities, once thought of as "too large to fail".
The industry now awaits the next steps to be announced by the FSA (FCA), including the hosting of an industry event to provide more clarity in terms of their expectations of member firms. Issues to be discussed will include the types of back up plan that asset management operations have in place, such as "insourcing" administration or using the "right of step in". Insourcing, or reversing the outsource process to take administration back in house, would clearly require substantial back up resource in terms of specialist personnel and systems and is unlikely to be workable. The "right of step in" involves the asset management company taking over the TPA's processes and systems in the event of the failure of the latter in order that administration functions such as Transfer Agency and Fund Accounting can be maintained. Again a somewhat unimaginable scenario in a large TPA, multi-client environment.
A potential solution being suggested is for asset management companies to have a back up TPA arrangement in place, whereby a second TPA could take over dealing and pricing activities very quickly, possibly by shadowing the original TPA on a full time basis. Fund management companies, in particular smaller and specialist providers, are likely to cite cost as a major issue with this as an option.
From anecdotal accounts we understand that the FCA will be paying closer attention to oversight arrangements generally and the extent to which asset management companies might be attempting to abrogate responsibility for the quality of fund administration. This is a slightly wider issue, but nonetheless could provide another indication of the regulator's intended focus going forward.