Future supervision of outsourcing firms will take into account industry guidance issued by the MiFID Connect project, says the Financial Services Authority.
This is the first guidance developed by the industry which the FSA has agreed to recognise since publishing its discussion paper: ‘FSA confirmation of Industry Guidance in November 2006’.
And in the first formal industry guidance relating to the Markets in Financial Instruments Directive (MiFID), the guidance covers so-called 'common platform' FSA firms – which are those subject to MiFID and/or the Capital Requirements Directive.
The FSA outsourcing rules, which will operate from 1 November 2007 when MiFID comes into effect, states that a ‘common platform firm’ must - when relying on a third party for critical operations - ensure it takes reasonable steps to avoid undue additional operational risk.
And it says firms must not “undertake the outsourcing of important operational functions in such a way as to impair materially the quality of its internal control and the ability of the FSA to monitor the firm's compliance with all obligations under the regulatory system” and to monitor the firm's compliance with all obligations under MiFID.
The FSA says the discussion paper – which it intends to respond to later in the year - set out plans to encourage greater use of industry guidance as the Regulator moves toward a more principles-based approach to regulation.
As a result it says it has worked closely with MiFID Connect - a joint project established by 11 trade associations to support members in implementing the directive - over several months to ensure its outsourcing guidance meets the recognition criteria.
It says the 26-page guidance “strikes a balance between legal interpretation and practical examples and will act as a benchmark for future industry guidance requests”, although the FSA says it will review the wording of its confirmation of the guidance once its formal response to the discussion paper has been published.
Michael Folger, director of wholesale and prudential policy at the FSA, says the body stressed in its paper on Principles-Based Regulation – published last month - that industry guidance will play a key role in helping firms determine how best to meet FSA expectations in the new regulatory environment.
He adds: “We think it right to proactively confirm this MiFID Connect guidance now ahead of our formal response later this year to the comments we have received on the industry guidance discussion paper.”
“It will help common platform firms ensure their existing outsourcing arrangements will meet the FSA's new requirements from 1 November 2007, when MiFID comes into effect. Firms need to start checking their approach now as MiFID does not exempt existing outsourcing arrangements."
However, at the Association of British Insurers’ (ABI) conference ‘Thinking for Tomorrow’, Clive Briault, managing director of retail markets at the FSA, confirmed while the Regulator might ‘confirm’ industry guidance, it would not trigger enforcement action by the FSA.
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