Central Bank of Malaysia’s Proposed Outsourcing Guidelines
Summary
SIFMA and ASIFMA responded to Bank Negara Malaysia (BNM) on the exposure draft of proposed regulatory requirements on outsourcing arrangements by financial institutions. We called for the outsourcing exposure requirements to be implemented in a way that supports cross-border trade and investment, while mitigating operational and financial stability risks.
Excerpt
November 2, 2017
Pengarah
Jabatan Dasar Kewangan Pruden
Bank Negara Malaysia
Jalan Dato’ Onn
50480 Kuala Lumpur
Via e-mail: pfpconsult@bnm.gov.my
Dear Sir or Madam:
The Securities Industry and Financial Markets Association (SIFMA)i and Asia Securities Industry & Financial Markets Associationii appreciate the opportunity to respond to the Bank Negara Malaysia’s (BNM’s or the Bank’s) exposure draft of proposed regulatory requirements on outsourcing arrangements by financial institutions. We also thank the BNM team for graciously granting us an extension by which to submit this consultation response. Outsourcing arrangements provide important services to financial institutions, enabling them to lower operational costs that, in turn, allows them to enter and expand in the Malaysian market. We hope that that the outsourcing exposure requirements will be implemented in a way that supports cross-border trade and investment, while mitigating operational and financial stability risks.
While we broadly support the objectives that the BNM is trying to achieve, we have several suggestions to improve upon the current proposal. For instance, we are concerned that the proposed pre-approval process does not include detailed principles or criteria by which BNM will grant approval for outsourcing arrangements. This introduces uncertainty in the investment climate in Malaysia for service providers and financial institutions, and will likely result in a backlog of approvals. To avoid these outcomes, we instead suggest using materiality thresholds and encourage adoption of vendor risk management frameworks whereby only material outsourced arrangements would be subject to BNM’s approval process. Further, we are concerned that the proposed “transitioning arrangements” do not include transparency principles or criteria by which BNM will determine appropriate transition measures. We expand on these suggestions below.
We note that BNM has imposed a moratorium on outsourcing systems, applications and processes on foreign banks since 2013, and that these new outsourcing requirements aim to go into effect 1 January 2018. Although not specifically mentioned in the consultation paper, we are concerned that the implementation of the outsourcing guidelines in Malaysia may result in a de facto on-shoring mandate. Outsourcing arrangements are critical to improving the efficiency of the financial services industry, enabling firms to provide stellar customer service, maintain competitiveness internationally, and reduce operational costs to boost investments in other areas that deepen local capital markets. We strongly encourage the Bank Negara Malaysia to continue to recognize the importance of outsourcing arrangements to our sector, and to adopt pragmatic policies to address potential risks from third-party service providers while enabling the efficiencies that they provide. We provide additional detailed responses to the consultation questions below.