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For Wealth Managers, Outsourcing Is No Panacea, Requires Close Oversight

Tom Burroughes

10 September 2024

A big task for wealth managers, private banks and others is ensuring that they don’t expose themselves – and their clients – to failings of the outsourced and third-party party providers they use. Overseeing the relationship requires constant vigilance, a compliance expert argues.

With a new UK government in office, and the world having received a lesson in resilience from the worldwide Microsoft/CrowdStrike outage in July, “resilience” is – or ought to be – front of mind.

Separately, keeping abreast of anti-money laundering and counter-terrorism rules is a relentless task, with geopolitical conflicts and associated financial sanctions and tech such as AI allowing compliance chiefs no respite.

The need to monitor outsourcing is a big responsibility, , speakers appeared to endorse the idea that the government will want to focus on making the City and wider financial sector more competitive – not so different than the approach taken by the previous government. At the end of July, the UK marked the first anniversary of the Consumer Duty regime in the UK. 

There has been an “explosion” in the number of firms providing outsourcing functions which makes monitoring them more demanding, she said.

A note on 2 May from the FCA said that firms increasingly depend on third-party providers and outsourcers. For example, there are many outsourced chief investment office (OCIO) providers, such as (1 June 2023), wealth and asset managers have been struggling to keep cost-to-income ratios in check. 

“While larger asset managers witnessed a gradual increase between 2018 and 2021 – with a rise to 74 per cent in 2022 – smaller asset managers with less than $300 billion in AuM saw a more pronounced increase to 78 per cent,” the report said. “CIRs for larger wealth managers have been stable at 71 per cent, while smaller wealth players, with AuM below $150 billion, suffered a steep increase to surpass 82 per cent in 2022, on average."

Part of the reason for this margin compression, the report said, is technology. The average share of technology in total operating expenses (also known as IT intensity) reached over 15 per cent across both wealth and asset managers in 2022, up from 13 per cent five years earlier. Over the same period, IT spending was particularly on the rise in application development (+25 per cent) and hosting (+19 per cent), mirroring both the expansion of new requirements as well as large investments in cloud migration.

In early February, the European Central Bank raised a red flag about tech outsourcing risks, saying that non-EU firms play a disproportionate role.

“Even though a growing number of external providers are offering their services within the EU, more than 30 per cent of the total outsourcing budget of significant banks is concentrated on 10 providers, most of which are headquartered outside the EU (mainly in the US). This relatively short list of major providers has remained rather stable in recent years, although banks’ reliance on a few large providers is potentially leading to idiosyncratic and systemic concentration risks,” the ECB said. 

AML
Nadershahi said that AML and associated controls on potentially questionable transfers remain a constant focus for ACA and its clients. And a related theme – as highlighted last summer by the Coutts “debanking” saga – is the need for firms to understand how to apply rules affecting politically exposed persons (PEPs), for example. 

“Are we asking the right questions and reviewing who potential PEPs might be in a year or two?” she said. Banks and other firms must remember that people designated as PEPs can and do lose that status.