Global Pioneer Mike Pierides Talks Outsourcing in the Financial Services Industry | Morgan Lewis – Technology and Procurement

As part of our Spotlight Series, we spoke with Mike Pierides, Deputy Head of our Technology, Outsourcing and Business Transactions Team and Co-Head of our Digital Solutions Industry Team, about outsourcing in the financial services (FS) sector.

From an outsourcing perspective, what differentiates the financial services industry from other industries?

The FS industry continues to be at the forefront of outsourcing developments and innovation as it drives cloud and AI adoption, and is arguably the industry that has really was the first to engage in outsourcing (though I’m far too young to remember). This makes it a very mature outsourcing industry, which has advantages like a sophisticated understanding of outsourcing, but also disadvantages, including large and complex legacy systems that can make switching to new technologies difficult and costly.

Regulation is also a key distinguishing factor for most other industries, which has shaped many contractual approaches in the industry.

Tell us a bit more about the regulatory framework.

To a large extent, the European Union and the United Kingdom have led the way with a number of regulatory directives related to financial services outsourcing, developed over the past 20 or so years. There are now specific guidelines in place from the European Banking Authority, the European Securities and Markets Authority for investment firms and the European Insurance and Occupational Pensions Authority, which are largely but not fully aligned. . The UK has similar rules in place.

The United States also has similar guidelines in place, both at the federal and state levels. One of the most significant developments in the United States is the draft “Guidance on Third-Party Relationships: Risk Management”, which has been released for consultation by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

What do these regulations cover?

A key theme, for all regulators, is to ensure adequate controls for the institution and its regulators over outsourced functions, so that they can oversee and audit them while they are in place, or terminate and bring them back in-house or move them elsewhere if there are issues with supply. Another critical topic to address is information security. Ultimately, regulation aims to reduce the risks associated with using a third party to perform an institution function.

The current direction is certainly more, rather than less, regulation and outsourced arrangements, or even SaaS and cloud-based arrangements such as CRM platforms, trade execution platforms, infrastructure virtual office, etc. regulations.

What is their impact on the negotiation of outsourcing contracts?

My experience is that outsourcing transactions in the FS industry generally take longer to negotiate. There is generally a good understanding in the industry, and also among industry suppliers, of the issues that need to be resolved, but where there is a lack of understanding, or a cautious interpretation or even a misinterpretation regulatory requirements, this inevitably slows down negotiations.

The significant interaction required with small and medium enterprises whose functions are subject to these regulations, particularly, perhaps in the context of infosec, also adds time and complexity.

Regulations can also act as a form of barrier to entry for new vendors without FS industry experience and knowledge.

Finally, you mentioned legacy systems and digital transformation; can you add a few words on these?

We have advised on a number of SF-related transformations as institutions such as banks or insurers seek to move away from or overlay their core legacy systems to or with cloud or cloud-native solutions. Of course, these are business-critical activities as financial services institutions seek to automate processes or use digital platforms to serve and interact with their customers.

Digital transformation is also potentially high risk, and in a particular regulatory environment, any significant negative impact on services during transformation will not be acceptable to the institution or its regulators. Although the main challenges at one level may seem mostly technical (e.g. ensuring that the functionality of the new system aligns with customer requirements, ensuring that data is mapped and transferred without major issues), this it’s not usually the technology that fails. More frequently, it is the poor interactions between people, teams at the customer and the supplier, which cause the most problems.

The outsourcing contract and its application are very powerful tools, perhaps the most powerful with senior management commitment, to motivate and encourage appropriate behavior on both sides. I believe that ensuring that the contract holistically addresses the transformation plan and processes, along with the associated change mechanisms and business incentives and disincentives, is essential to ensure the success of the transformation and mitigate the risk of the institution embarking on a transformation program.

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