The Cayman Islands Monetary Authority (CIMA) has laid down fresh guidelines for the financial services industry on outsourcing, saying it wants to protect the industry from potential loss or damage in the event of outsourcing failure.
Under the new laws, the financial services firm, rather than the outsourcing service provider, will be responsible for the damage caused to individual clients. The regulator has made it clear that financial service firms must assess their sourcing partner to identify conflicts of interests and put in place preventative measures to manage such conflicts.
The regulator has set a deadline of August 2016 for banks to review their outsourcing policies and fix flaws. “Deficiencies in existing outsourcing agreements should be addressed when the outsourcing arrangement is renewed or extended,” says the guideline.
The guidance applies to all regulated entities except for investment funds and private trust companies.
The regulator has instructed firms to adopt certain policies and procedures and make sure that their outsourcing terms align with the new standards. Guidance includes setting up a committee to oversee the conduct of service providers and putting in place ‘feasible’ contingency plans in the event of outsourcing failures.
One of the world’s largest financial centers and a well-known tax haven, this British overseas territory in the Caribbean has more registered businesses than it has people. Typical functions being outsourced in Cayman include back-office and administrative activities, such as IT operations, accounting and HR, or on the risk management side, such as compliance or audit tasks.
To enjoy tax benefits, companies need to be physically present in the island. Thanks to its small population size, the island is yet to make its name in the global outsourcing industry.
Cayman Enterprise City was specifically created to cater to smarter and tech-savvy industries. Some of the world’s biggest banks including HSBC, Deutsche Bank, UBS, and Goldman and Sachs have operations on the island.
Outsourcing can reduce costs and increase efficiencies, but it can also ‘heighten strategic, reputation and operational risk,’ the regulator has warned.