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Regulator Guidance: Outsourcing to the 'cloud' for financial services
The FCA has published proposed guidance for firms considering outsourcing to the ‘cloud’. 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.
Steps in the right direction
The FCA’s consultation follows its 2014 guidance on the use of third party off-the-shelf technology to support operations but is the first time the FCA has issued guidance specifically directed at cloud services. The ‘cloud’, as considered by the FCA, is a collective term that is much broader than just public cloud and is seen to encompass 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 guidance seems to indicate that the FCA considers that there is no fundamental reason per se as to why financial services firms should not use cloud services. However the FCA identifies certain key risks to be considered when outsourcing to the cloud, including the lack of direct control which may enable service providers to move data around within their virtualised system without reference to the customer or contract out parts of their operations to other providers without the customer realising.
Guidance consultation 15/6
The guidance identifies a number of areas of interest that regulated firms should consider, and provides some recommendation and guidance:
- Legal and regulatory considerations. Firms should conduct due diligence and ensure that the outsourcing contract complies with FCA rules. Having a place a clear business case for using the service provider is crucial and the entire supply chain should be identified, including the location of the service providers.
- Risk management. Firms must identify and manage any risks associated with the outsourcing, and require prompt notification of breaches from the cloud provider, as well as remediation of breaches.
- International standards. Adherence by the cloud provider to international standards are likely to be helpful.
- Oversight of cloud provider. Firms will retain full accountability for discharging all regulatory responsibilities and cannot delegate them to the cloud provider. Clear lines of responsibility and accountability must be set out.
- Data security. Detailed security risk assessments will help in understanding security processes and how the data is transmitted, stored and encrypted, including where data is stored, and will be key in identifying the risk of data loss.
- Data protection. Whilst data protection requirements are separate to FCA requirements, firms are reminded of compliance with the Data Protection Act 1998, and in particular the ICO’s guidance on cloud computing.
- Effective access to data. Effective access to data should be made for the firm, its auditors and regulators.
- Access to business premises. Access must be provided to business premises of the third-party service providers for the firm, its auditors, and for regulators.
- Relationship between service providers. Sub-contracting arrangements should be closely reviewed to determine whether they enable firms to comply, including security, access to data and access to business premises.
- Change management. Comprehensive change management processes should be in place, in particular setting out how changes to the provision of services will be made and how testing of changes will be carried out.
- Continuity and business planning. Arrangements should be in place to ensure that the firm can continue to operate and meet its regulatory obligations in the event of an unforeseen interruption, including an intentional cyber-attack.
- Resolution. Cloud services should not be organised such that they create additional complexities in a resolution and become a barrier to the resolution or orderly wind-down of a firm.
- Exit plan. The ability to exit outsourcing arrangements without undue disruption to the services or compliance with the regulatory regime is important.
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, partly for the following reasons:
- Commercial Pressure - Cloud suppliers have traditionally struggled to sell to financial services companies their services clashing with regulatory requirements. The cloud providers have begun to adapt their offerings to assist with compliance and make more sales in an increasingly competitive environment.
- Collaboration - Several large financial services companies, whether alone or in collaboration with others, have already invested in cloud environments they can control to an extent sufficient to ensure regulatory compliance.
However, a key stumbling block still looks likely to remain that there is a lack of certainty as to exactly what standard in each case would likely be acceptable to the FCA. This places the risk on each financial services firm to assess each supplier offering and individually determine if it is sufficient to meet high-level and generic FCA (and PRA) standards. Whilst the proposed guidance and consultation will we hope lead to further clarity on the FCA approach and requirements, a number of key issues remain to be solved before we see widespread and simple adoption of cloud solutions in the financial services sector.
Find the full text of the guidance here.