EU may put squeeze on outsourcing

Ban may include core activities in financial sector.

After the US, the European Commission is tightening the screws on outsourcing.

The Committee of European Banking Supervisors (CEBS) has put out a consultative paper proposing a total ban on outsourcing of strategic or core activities, which broadly include management functions like strategic oversight, risk management and strategic control.

The paper was circulated by the Financial Supervisory Authority of the United Kingdom on April 30 for suggestions. It proposes a total ban on outsourcing of core services in the first stage.

On all other activities, material or non material, the outsourcing institutions will have to comply with the requirements of their respective supervisory authorities, either in terms of pre-notification or ensuring supervisory guidelines.

CEBS is an advisory body to the European Commission which came into existence on January 1 this year. It consists of high level representatives from the banking supervisory authorities and central banks of the European Union.

Though the actual quantum of financial services outsourced out of Europe is not known, the proposal is expected to complicate the outsourcing process due to the proposed intervention of the supervisory authorities. Particularly the pre-notification clause is expected to result in a lot of extra paper work and bureaucracy.

The chief of an Indian business process outsourcing (BPO) unit said: "Essentially, the EC wants to put in place a framework to regulate outsourcing and recognise the risk factors associated with some of the outsourcing work. This does not mean that we will lose business."

As most banks and financial institutions have refrained from outsourcing core activities, it may not have a major impact on India's burgeoning BPO industry though the financial sector accounts for the biggest chunk of its clientele.

The paper also suggests that outsourcing of non-strategic but material activities need to be pre-notified to the authorities while non strategic and non material activities should comply with the supervisory guidelines.

Shutting the door

• The Committee of European Banking Supervisors is proposing a total ban on outsourcing of strategic or core activities, which broadly include management functions like strategic oversight, risk management and strategic control.
• The proposal is expected to complicate the outsourcing process due to the proposed intervention of the supervisory authorities.
• The committee's primary focus is on financial institutions' own risk management in the area of outsourcing and is lighter on supervisory measures.