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Outsourcing to the 'cloud' for financial services
The FCA has published its finalised guidance for firms considering outsourcing to the ‘cloud’ and other third party IT services. This follows feedback from stakeholders, including regulated firms and cloud service providers, that there is a lack of clarity about how the FCA applies its rules in connection with outsourcing to the cloud. This ambiguity in FCA rules to date has often been seen as a key barrier preventing regulated firms from using the cloud. The finalised guidance follows on from the guidance consultation (GC15/6) issued in November 2015. We have produced a paper on GC15/6 that can be found here. This paper seeks to outline the changes that the FCA has now decided to include in the final guidance having listened to the feedback submitted in relation to GC15/6.
Changes from GC15/6
The changes the FCA has made to its final guidance are summarised as follows:
Definitions of ‘the cloud’: The FCA maintains a definition of the ‘cloud’ as a collective term that is much broader than just public cloud and encompasses a range of IT services provided in various formats over the internet including private or hybrid cloud, as well as Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS). The FCA resisted calls to clarify how the guidelines apply to the use of ‘public’, ‘private’ and ‘hybrid’ clouds specifically.
Critical, important or material outsourcings: A number of respondents sought clarity on what type of functions constitute critical, important or material outsourcing, asking for examples of relevant services, and examples of services that would be considered non-critical, important or material. The FCA stated that it would prefer that firms make an assessment of what services are critical, important or material in the context of their own outsourcing arrangements. The FCA did seek to provide further clarity by referencing MiFID Connect, which provides some non-exhaustive examples of the types of services that may be considered critical or important. A link to MiFID Connect can be found here.
Legal and regulatory considerations: The FCA rejected calls to amend the guidance in respect of operational risk and effective access to data and business premises for the firm, auditor and relevant regulator under contracts governed by UK law. However, it did modify the guidelines as they related to firms identifying all providers in a supply chain. The FCA acknowledges that the requirement to identify providers should only apply to services related to the regulated activity being carried out and will not necessarily include all providers in the supply chain.
Risk management: The FCA clarified that “concentration risk”, in its guidance, refers to its expectation that firms should monitor any reliance they themselves have on a single provider, consider the action they would take if this provider failed, and whether any concentration risk is within their risk tolerance.
International standards: This section has remained the same with the FCA noting that there were some calls for further clarity but the FCA believes that it should be for firms to consider whether and how external assurance may be obtained when conducting their own due diligence.
Oversight of cloud provider: Despite some calls from respondents to remove the requirement for firms to retain sufficient skills and resources to test the outsourced activity, the FCA reiterated its view that it considers it is appropriate for firms to have the skills and resources to test outsourced activity and that it considers it an important part of a firms oversight of their provider to have sufficient in-house ability to supervise their outsourcing arrangements, and to take control of the relevant functions if things go wrong.
Data security: Following the feedback received from respondents the FCA has amended this section in to take into account the fact that some cloud providers cannot allow firms full control of the jurisdictions in which their data is held. Firms should now agree a data residency policy with the provider, which sets out the jurisdictions where their data can be stored, processed, and managed. Providers should have discretion to store, process and control data in the jurisdictions outlined in this policy which are considered acceptable by the firm.
Data protection: The FCA rejected calls to reference the upcoming EU General Data Protection Regulation in this section stating that it felt this section already signposts the relevant considerations that firms should comply with.
Effective access to data: This section elicited a number of responses from firms and providers in relation to the expectation that firms have “no restrictions” on the number of requests they can make of the provider to access or receive data. The FCA has not altered its guidance on this section, however, it has clarified that the concept of “effective access” is broad and wide-ranging, and it do not consider it appropriate to seek to narrow the scope of this requirement. It is the FCA’s belief that there should not be limits of the number of requests firms make, which could undermine the ability to have effective access. The FCA did clarify that there may be circumstances in which the data cannot be provided, but this is not inconsistent with the wording in the guidelines.
Access to business premises: As with the preceding section, this requirement drew a number of responses due to concerns around the expectation of a firm having physical access to a provider’s business premises. The FCA note that physical access to data centres may not always be necessary to provide effective access, but it also consider there may be circumstances where physical access to data centres is necessary for a firm to meet its regulatory requirements. Consequently it has amended the guidance to make it clear the relevant SYSC rules that firms need to take into account, and to clarify that ‘business premises’ is a broad term which may include head offices, operations centres, but does not necessarily include data centres.
Relationship between service providers: Over half of respondents commented on this section pointing out the burden of expecting firms to review all sub-contracting arrangements as well as the confidentiality issues that would exist between the provider and sub-contractor. As a result the FCA has modified its guidance to the extent that this requirement will only apply to those arrangements relevant to the provision of the regulated activity.
Exit plan: The FCA has amended this section and now expect that exit plans are “fully tested”. This was as a result of concerns raised in relation to the expectation that exit plans be “regularly rehearsed” which was viewed by many as unduly onerous.
Whilst we have waited a long time for the FCA to give its views on cloud computing, we have already seen a growing number of companies in the financial services sector adopting cloud solutions. However, despite this guidance from the FCA a key stumbling block still looks likely to remain that there is a lack of certainty as to the appropriate standard in each outsourcing.
Whilst this guidance does clarify a number of issues stemming from the consolation in November 2015, it is still not specific and clear enough to allow firms to 100% confidently outsource critical and important functions to cloud solutions. However, the guidance is not binding and is intended to illustrate ways in which firms can comply with the relevant rules. The FCA expect firms to take note of the guidance and, where appropriate, use it to inform their systems and controls on outsourcing.
Find the full text of the final guidance here.