Outsourcing remains in focus

At the end of 2017, the Swiss financial market supervisory authority Finma published new rules for outsourcing at banks and insurance companies. The circular will be implemented as of 1 April 2018 and will provide further legal support for the trend towards outsourcing.

In preparation for the new rules, Finma has heard representatives of the financial and insurance industries. This hearing was met with great interest, according to the statement. In addition to banks, securities dealers and insurance companies, numerous companies indirectly affected by the new rules also expressed their views, according to Finma. In principle, the participants in the hearing acknowledged that there is a need for appropriate supervisory requirements for outsourcing and for dealing with the associated risks. They also found that adjustments to the Circular were necessary due to technological developments.

Concerns of the financial industry taken on board
The suggestions of the industry representatives consulted seemed to have fallen on Finma's ears. For example, the concept of the materiality of outsourcing projects was defined in a more principle-oriented manner. In this way, Finma strengthened the financial institutions' autonomous self-assessment. The requirements for the outsourcing of risk management and compliance functions have also been clarified. Finma now permits the principle-oriented consideration of the group and group context in internal outsourcing. It refrained from regulating special implementation provisions for systemically important banks in the aforementioned Circular. Furthermore, the transitional period for adjustments to existing outsourcing arrangements at banks was extended from two to five years. In the case of insurance companies, the Circular applies to all new licences and business plan amendments from the date of entry into force.

Outsourcing: Eastern Europe in particular is the trend
A recent study by Strategy&, PwC's strategy consultancy, confirms that these topics are relevant for the financial sector. "In recent years, large Swiss banks and insurance companies have significantly increased their outsourcing activities and established various centres in Eastern Europe," explains Dr. Utz Helmuth, Principal in the strategy consultancy's Zurich office and one of the authors of the publication "Building the modular bank. Sourcing strategies in the age of digitalization." In terms of the locations set up, major Swiss banks show a preference for Poland (Krakow, Warsaw and above all Wroclaw), while insurance companies have set up mainly in Slovakia in the greater Bratislava area. Overall, the relocations mainly affect back-office areas that are remote from customers, such as internal audit, HR, risk, compliance, operations and IT.

60 percent savings possible?
According to the study mentioned above, potential savings are the main motivation for outsourcing. The analysis by Strategy& assumes savings of up to 60 percent, mainly due to the high difference in wage costs compared to Switzerland (40 to 50 percent). "Even if not all of the 15,000 jobs were relocated from Switzerland, but also from other locations, the pressure on Swiss locations to be efficient remains high in view of this difference in wage costs compared with Eastern Europe," says Helmuth.

But if savings are actually to be achieved through outsourcing, various aspects must be taken into account. Utz Helmuth sees various challenges in this regard that should not be underestimated. On the one hand, there is the need for functioning outsourcing governance: Finma is sticking to its strict requirements as to what may and may not be outsourced. Despite concerns from the financial industry, the financial market regulator continues to insist on its inspection rights for new cloud services. Another issue that is not easy to deal with is the operational

Management of the outsourced units: The daily collaboration with new colleagues in the external offices has repeatedly proven to be "challenging" for Swiss companies, as Utz Hel-muth puts it - perhaps rather mildly. The fluctuation rates among employees in Eastern Europe and India are unusually high, he explains. And last but not least, there is still a need for a clear strategy as to how the digital transformation and process automation in the back office should be approached: namely by building up in-house capabilities or by using the technological expertise of a leading global provider.