The Investment Industry Regulatory Organization of Canada (IIROC) today issued updated guidance that aims to guard against risks sparked by firms’ use of outsourcing arrangements.
IIROC published two updated guidance notices today on firms’ outsourcing and clearing arrangements. The regulator proposed changes to both guidance notes back in October 2012.
The notice concerning outsourcing acknowledges that the concept of outsourcing certain functions in the brokerage industry is not new; however, it says that “as firms face increasing competitive pressures to contain and reduce costs, there is a corresponding trend to outsource more business functions, activities and processes” in ways that the existing rules “do not adequately address”.
In particular, it notes that self-clearing dealers are increasingly interested in outsourcing the daily management of books and records. “Without adequate safeguards, this industry trend may give rise to incremental investor protection, market reputation, credit and systemic risks,” it warns.
The notice goes on to set out the existing requirements and guidance; define the activities that cannot be outsourced, including KYC and suitability assessments, and complaint handling; spells out IIROC’s expectations for the due diligence that firms must carry out before outsourcing any activity; and, sets out IIROC’s plans to propose rules relating to outsourcing. The updated guidance is to take effect on April 14.
“We want to ensure we strike the right balance between requiring the appropriate protections while reflecting the business realities that prompt firms to outsource functions,” said Rosemary Chan, IIROC senior vice-president, member compliance, general counsel and corporate secretary.
Separately, the regulator has also issued updated guidance on clearing arrangements that explains what a clearing arrangement is; why IIROC’s rule regarding introducing/carrying broker arrangements do not apply to clearing arrangements; and, setting out practical issues and outsourcing due diligence obligations that should be addressed when considering whether to enter into a clearing arrangement.