Thursday, August 09, 2007

MiFID highlights lack of good practice in outsourcing

Some time back I remember hearing PJ DiGiammarino of the JWG-IT Working Group mention that outsourcing contracts were likely to be impacted by the Markets in Financial Instruments Directive (MiFID).

Then we never heard another whisper about it in a lot of the high level debates about MiFID which tended to focus on best execution, pre- and post-trade reporting and client classification. All worthy subjects, but it appears now that outsourcing and MiFID are finally in the spotlight with a survey by law firm, Field Fisher Waterhouse, revealing that most financial services organisations’ outsourcing agreements still fail to comply with MiFID.

How can that be so? Well Field Fisher Waterhouse says that the main points of failure are that 40% of firms do not have an up-to-date exit management plan in place with their service provider; 36% do not have their regulatory team review its contracts; 33% do not have a service level agreement in place with every service provider; 32% do not regularly test service provider’s disaster recovery; if an outsourcing provider fails to meet regulatory standards, 31% do not have the right to terminate the agreement; and more than 30% of outsourcing agreements do not require the provider to regularly test back up facilities.

These are some pretty glaring oversights, when you consider that irrespective of MiFID and with the buy-side outsourcing more than just non-core back office processes to providers, they do not even bother to question or test whether that provider is able to keep the show on the road if and when a disaster strikes.

Field Fisher Waterhouse technology partner Simon Briskman had this to say to firms nervously scratching their heads wondering how to put this right before the 1 November MiFID deadline:

“In order to achieve the deadline, firms need to engage their suppliers in negotiations now. Many companies have assumed that the outsourcing rules under MiFID are no more than an extension of the current rules and reflect good practice. To some extent this is true and our survey suggests that good practice is often not met in financial services outsourcing.”

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