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The Swiss Financial Market Supervisory Authority (FINMA) has implemented changes to its supervisory requirements in relation to outsourcing solutions at banks, securities dealers and insurance companies (referred to as companies). FINMA issued a revision to Circular 2018/3 “Outsourcing – banks and insurers” (the Outsourcing Circular) which came into effect on 1 January 2020 although there is a transitional period, which banks and securities dealers given up to 5 years to adapt existing outsourcing arrangements.
The Outsourcing Circular applies to the outsourcing of significant functions.
Outsourcing is defined as the appointment of a “service provider to perform all or part of a function that is significant to the company’s business activities independently and on an ongoing basis”.
Significant function means a function that has “a material effect on [the company’s] compliance with the aims and regulations of financial market legislation.”
Scope of application
The Outsourcing Circular applies to:
Its requirements should be applied taking into account the institution’s size, complexity, structure and risk profile.
The revised requirements allow the outsourcing of all significant functions subject to several exceptions, such as the direction, supervision and control by the companies’ “supreme governing body”, its central executive management functions and functions, and its decision making relating to starting and ending business relationships.
The rules also permit outsourcing of a wider set of management and control functions for insurance captives than for other insurance companies.
Requirements for outsourcing companies
Part V of the Outsourcing Circular sets out various requirements for outsourcing companies. These impact the procurement, contracting and contract management processes in terms of what must covered by selection, due diligence and ongoing management, and included in outsourcing agreements, namely:
Outsourcing to another country is admissible provided the company can expressly guarantee that it, its audit firm and FINMA can assert and enforce their right to inspect and audit information. Further, the possibility of restructuring or resolving the company in Switzerland must be assured, hence access to information required for this purpose must be possible in Switzerland at all times.
Use of subcontractors
A significant change is that FINMA has replaced the previous requirement for prior approval by the company of any subcontractors.
Service providers must now simply inform the company of the use or replacement of a subcontractor for significant functions at an early stage and the company must retain the option of terminating the outsourcing relationship should it wish to do so. With this in mind, FINMA point out that provision must be made in the outsourcing agreement for insourcing the outsourced function or transferring it to another service provider in an orderly manner.
Subcontractors must be bound by the obligations and guarantees on the part of the service provider that are necessary to comply with the Outsourcing Circular.
Small banks regime
The changes made to the Outsourcing Circular are part of a series of changes which FINMA is implementing, which exempt small, particularly liquid and well capitalised banks from certain regulatory requirements. This follows a pilot project with 68 participating institutions which came to an end on 31 December 2019.