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In the context of digitalisation and given the increasing importance of new financial technology (Fintech) providers, financial institutions are adapting their business models to embrace such innovations. Some have intensified the use of Fintech solutions and have launched projects to improve their cost efficiency also in response to the intermediation margins of the traditional banking business model being put under pressure by the low interest rate environment. Outsourcing is a way to get relatively easy access to new technologies and to achieve economies of scale.
The new Guidelines, which are consistent with the requirements on outsourcing under the Payments Services Directive (PSD2), the Markets in Financial Instruments Directive (MiFID II) and the Commission's Delegated Regulation (EU) 2017/565, aim at ensuring that institutions can apply a single framework on outsourcing for all their banking, investment and payment activities and services. Such a framework also ensures a level playing field between different types of financial institutions.
In particular, the Guidelines clarify that the management body of each financial institution remains responsible for that institution and its activities at all times. To this end, the management body should ensure that sufficient resources are available to appropriately support and ensure the performance of those responsibilities, including overseeing all risks and managing the outsourcing arrangements. Outsourcing must not lead to a situation in which an institution becomes an ‘empty shell' that lacks the substance to remain authorised.
Particular challenges to ensure the effective supervision of institutions and payment institutions exist when functions are outsourced to service providers located in third countries. Financial institutions are expected to ensure compliance with EU legislation and regulatory requirements (e.g. professional secrecy, access to information and data, protection of personal data) in particular regarding critical or important functions outsourced to service providers.
In this respect, the Guidelines specify which arrangements with third parties are to be considered as outsourcing. The Guidelines differentiate between requirements on critical and important outsourcing arrangements and other outsourcing arrangements Outsourcing of critical and important functions has a higher impact on the institutions' and payment institutions' risk profile. Hence, the requirements are stricter as compared to the requirements for other less risky outsourcing arrangements.
Finally, competent authorities are required to effectively supervise financial institutions' outsourcing arrangements, including identifying and monitoring risk concentrations at individual service providers and assessing whether or not such concentrations could pose a risk to the stability of the financial system. To identify such risk concentrations, competent authorities should be able to rely on comprehensive documentation on outsourcing arrangements compiled by financial institutions.