CIMA: Proposed changes to outsourcing arrangements for funds service providers
By Matt Roberts From Harney Westwood & Riegels Contact
The Cayman Islands Monetary Authority (“CIMA”) has recently released a draft Statement of Guidance: Outsourcing All Regulated Entities (Excluding Regulated Mutual Funds) (“SOG”) and Consultation Paper (“Paper”).
The Paper calls upon the private sector to make submissions to CIMA in respect of the SOG, which submissions are due to be received by 5pm Cayman Islands time on Monday, 11 May 2015. The SOG is relevant to all entities that are regulated by CIMA in the Cayman Islands, for example Cayman Islands professional corporate services providers, administrators and trustees which are regulated under Cayman Islands legislation such as the Banks and Trust Companies Law, Insurance Law, Mutual Funds Law, Companies Management Law and Securities Investment Business Law (amongst others). Importantly, the SOG excludes entities that are mutual funds regulated pursuant to the Mutual Funds Law.
Key Points
– Pursuant to the Monetary Authority Law of the Cayman Islands (“MAL”), CIMA has issued the SOG in order to improve CIMA’s regulatory framework on outsourcing. The SOG is not intended to be prescriptive or exhaustive, rather the SOG sets out CIMA’s minimum expectations on the outsourcing of material functions or activities and outsourcing arrangements.
– Although CIMA has acknowledged that regulated entities regularly use outsourcing arrangements to reduce costs, increase efficiencies and overcome internal capacity limitations, CIMA is concerned by the heightened risks posed by using such outsourcing arrangements.
– CIMA has indicated that as a result of self-assessments conducted, there are a number of risk areas where processes can be strengthened with respect to CIMA’s existing regulatory policy and international standards such as those set by BASEL, IOSCO, IAIS and GIFCS.
– CIMA has acknowledged that there are ten existing measures that are currently part of its regulatory framework that provide guidance to regulated entities (primarily other Statements of Guidance) and has proposed to issue the SOG to consolidate these measures and address existing gaps in its regulatory policies.
– CIMA has noted that the draft SOG is intended to provide guidance to regulated entities (including sub-contractors where applicable) on the following matters:
appropriate due diligence of service providers;
contents of outsourcing agreements;
materiality assessments of outsourcing arrangements (i.e. impact of outsourcing arrangements on the entity and its finances, reputation and operations);
confidentiality and disclosure of information;
what Governing Bodies (i.e. Board of Directors) of regulated entities are expected to do with respect to the outsourcing of material functions or activities;
termination and exit strategies; and
expectations with respect to a regulated entity’s relations with CIMA regarding the outsourcing of material functions or activities.
– CIMA has noted that the proposed SOG is designed to more closely align with the relevant international standards as well as the Group of International Finance Centre Supervisors Standard on the Regulation of Trust and Corporate Service Providers.
– CIMA has also noted that the SOG is intended to improve risk management processes and eliminate some of the risky practices seen in industry currently and has noted that “the outsourcing of functions or activities should not cause a regulated entity to be a ‘shell’ or ‘letter-box entity’”.
Comment
We welcome the issuance of the SOG as a helpful step towards improving the clarity of CIMA’s regulatory policy concerning outsourcing arrangements. The consolidation of this policy into one SOG makes it much easier for the Cayman Islands funds industry to digest and should improve the industry’s adherence to such standards.
CIMA is continuing to demonstrate its ongoing commitment to improving governance processes in the Cayman Islands. Although not yet finalised, the draft SOG is a “shot across the bow” and service providers that are subject to regulation to CIMA should take steps now to review their existing outsourcing arrangements with respect to the draft SOG and consider whether further processes or improvements should be made to properly manage the risks of such arrangements. Interested stakeholders may also wish to consider providing their comments prior to the requested deadline for submissions of Monday, 11 May.
Harneys will continue to monitor these developments.
