KARACHI: The State Bank of Pakistan (SBP) said on Tuesday all new outsourcing arrangements by financial institutions (FIs) will be governed by a new framework.

The SBP revised the Guidelines on Outsourcing Arrangements to enable FIs, including banks, microfinance banks and development finance institutions (DFIs), to effectively manage the potential risks associated with outsourcing arrangements. The revised instructions are called Framework for Risk Management in Outsourcing Arrangement by Financial Institutions.

The SBP earlier introduced the guidelines on outsourcing arrangements for banks and DFIs in 2007. The guidelines were issued in view of the increasing use of outsourcing of services by banks and DFIs and potential impact of associated risks and obligations to customers.

The SBP has recently issued a series of guidelines and amended regulations for FIs to address risks related to money laundering and terror financing.

The new framework is based on international standards and best practices. These instructions aim to enhance the proactive environment in FIs on various aspects of the outsourcing including, but not limited to, governance, risk management, in-sourcing of services, group outsourcing, outsourcing of foreign branches of banks, information technology outsourcing and collaboration/outsourcing arrangements by FIs with financial technologies.

The framework also encompasses the list of critical functions and activities that cannot be performed by employees of the third-party service-providers.

While deciding to outsource any function, activity or process, the FIs will ensure that outsourcing neither affects the protection available to depositors or investors under the existing legal framework nor the same will be used to avoid compliance with the regulatory requirements. “The FIs are required to ensure that their existing outsourcing arrangements would be aligned with this framework latest by June 30, 2018,” said the SBP.

Published in Dawn, June 21st, 2017