Singapore defines CEO and board expectations for outsourcing risk

Singapore's financial regulator has issued its long-awaited consultation on the management of outsourcing risk. Issued as a consultation paper, the guidelines detail board and senior management responsibilities when outsourcing "material" banking functions.

The Monetary Authority of Singapore (MAS) is accepting comments by April 12th, 2004.

Outsourcing functions are material when, if disrupted, they have the potential to significantly impact ‘business operations, reputation, or profitability.’

Factors identified in the consultation paper include importance of the business activity (e.g., in terms of income and profit); potential impact of the outsourcing on earnings, liquidity, and risk profile; and cost of outsourcing as a proportion of total operating costs.

Where board and senior managers determine that outsourcing is material, the government "expects an institution to demonstrate that it has established a robust risk management framework" for identification, measurement, monitoring and control of risks and risk mitigation strategies.

The consultation paper analyses three governance objectives:
* First, ultimate responsibility rests with the board and senior management. Hence, corporate leaders may delegate day-to-day operational duties to the service provider, but not responsibility and accountability for strategic risk and security objectives.

* Second, board and senior management are responsible for evaluating the most critical business risks, including adequacy of insurance and strength of internal controls in service provider operations. The guidelines focus in particular on business continuity, including the ability to retain control in the event of a crisis. Geopolitical risks could undermine business functioning even where service providers portray high levels of competence and professionalism.

* Third, legal and business agreements must memorialise appropriate audit, control, compliance, and testing expectations. Here, too, the board and senior management must ensure that policies and practices are in place to address legal contingencies. These may cover subcontracting by the service provider, performance standards and targets defined in terms of service levels, and default terminations.
Although the guidelines are limited to banking activities, the consultation paper offers an excellent corporate model for governing complex outsourcing relationships in other critical infrastructure sectors.

The MAS supervises Singapore's banking, insurance, securities and futures industries, and develops strategies in partnership with the private sector to promote Singapore as an international financial centre. MAS also manages monetary policy, issues currency, and oversees foreign reserves and the issuance of government securities.

Source: Zeichner Risk Assessment Newsletter. To subscribe to this weekly newsletter, click here.

•Date: 16th March 2004 •Region: SE Asia •Type: Article •Topic: Financial sector
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