Boston - Markets in Financial Instruments Directive (MiFID), a European Union (EU) directive going into effect by November 2007, may affect the conduct of business and approach to operational risk of insurers that operate within the EU and who either provide or procure outsourced services.The directive will require that U.S. financial institutions—including insurers--operating within the EU that outsource an operational function to:

  • build and maintain a function within its own organization that is competent to manage the outsourced service provider and related risks;
  • not delegate its compliance and regulatory obligations to the outsourced service provider -- the ultimate obligations remain with the financial institution;
  • be able to continuously monitor the services, particularly with regards to quality;
  • have in place appropriate disaster recovery and business continuity systems/plans that work in an outsourced environment.

Additionally, EU financial services institutions who wish to outsource operational services or continue with existing outsourcing relationships will only be authorized by their prudential regulator to do so if they follow the requirements of MiFID.
For financial services institutions that deal with retail customers, the regulatory burden imposed by MiFID on outsourcing relationships is even more stringent, according to Brown Rudnick Berlack Israels LLP, a Boston-based international law firm. For example, if a service provider in India provides back-office function for the asset management subsidiary of a retail bank in the EU, then the service provider will need to enter into an agreement with the local regulator of such a financial services institution, such as the Reserve Bank of India, so that the service provider is subject to prudential regulation in the location from where it provides the services.

If such a supervisory relationship is not established by the non-EU service provider and the local regulator, according to Brown Rudnick, then the supplier's customer risks losing its regulatory approvals to operate its business.

Source: Brown Rudnick Berlack Israels LLP


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