Executive Council President Julian Rolle First Vice President Zelma Wilson Second Vice President Lynden Maycock Secretary Lambert Longley Asst. Secretary Jasmine Davis Treasurer Reece Chipman Asst. Treasurer Candice Murton
The Central Bank of The Bahamas
In its September 2008 quarterly communication to licensees, the Central Bank (the Bank) foreshadowed a review of its Minimum Standards for the Outsourcing of Material Functions (the revised Guidelines), which sets out the Bank's expectations for licensees that outsource or contemplate the outsourcing of one or more of their business activities to a service provider. The review has been completed and the Bank proposes to issue a revised version of the Guidelines. The objective of this review was to incorporate, where possible, a more risk-focused approach into the Bank's consideration of these service level arrangements. The revisions primarily seek to reflect this rationale and clarify the Bank's expectations with respect to which types of outsourcing arrangements requires the Bank's prior approval before a licensee may enter into them.
Applicability
The scope of the revised Guidelines is limited to the material outsourcing arrangements of a licensee. However, the Bank requires that licensees conduct a self-assessment of all existing outsourcing arrangements against the revised Guidelines. Where the outsourcing is found to be material and has not received the Bank's prior approval, licensees are given two months from the date of issue of the revised Guidelines to regularise the situation. More importantly, however, where licensees identify deficiencies in their outsourcing arrangements during the self-assessment, they have a one-year transition period to correct these deficiencies. Where rectification concerns an existing contractual agreement, licensees are given leeway to correct them when the agreements are substantially amended, renewed or extended, whichever is earliest.
To assist in implementation, the revised Guidelines provide examples to which they are applicable and arrangements to which they are generally not applicable. We emphasise, however, that these are only examples and are not meant to circumscribe the application of the revised Guidelines to arrangements not listed.
Approval Requirements
The revised Guidelines clarify and emphasise the circumstances when a licensee must seek the prior approval of the Bank with respect to material outsourcing arrangements. The revised Guidelines also include the documentation, which must be submitted when seeking the Bank's prior approval. An important new requirement, which is similar to the provision in our Business Continuity Guidelines, is that licensees should seek a legal opinion that the outsourcing arrangement complies with relevant statutory requirements related to client confidentiality (particularly Section 19 of the Banks and Trust Companies Regulation Act, 2000), other applicable Bahamian legal requirements and Supervisory, Prudential or Operational Guidelines issued by the Bank.
Determining the Materiality
The materiality of an outsourcing arrangement will depend on the extent to which it has the potential to have a critical impact-both qualitative and quantitative-on a significant line of business of the consolidated operations on the licensee or the Bahamas operations of a foreign branch or subsidiary. The revised Guidelines suggest a standardised template of questions to which licensees should subject all outsourcing arrangements to determine if the Bank would regard them as "material". Notwithstanding this assessment, licensees are encouraged to consult the Bank, where there is doubt.
Risk Management
The revised Guidelines continue to operate on the premise that licensees retain ultimate responsibility for all outsourced activities and set out in separate sections the accountability and responsibilities of the Board of Directors and Senior Management and the due diligence licensees should conduct on potential service providers. An important new requirement in the revised Guidelines is for senior management to maintain a centralised list of all material outsourcing arrangements, the minima information that should be included on this list and that this list should be a part of senior management's reports to the Board of Directors or head office, as appropriate.
Significantly, the revised Guidelines make it clear that licensees should document the due diligence undertaken during the selection process and re-perform this due diligence periodically. The Bank does not and will not define the periodicity for re-performing this due diligence, as this should be done commensurate with the level of risk involved. Nevertheless, the revised Guidelines make it clear that information used for due diligence evaluation should be current, i.e. no more than twelve months (12) old.
The revised Guidelines clarify that licensees should ensure that an outsourcing arrangement in no way impedes its ability to effectively, manage and monitor outsourcing arrangements. Importantly, it also clarifies that the Bank's ability to perform its supervisory functions should not be constrained in any way. In this respect, the revised Guidelines include minima contractual terms that the Bank will look for when reviewing these arrangements.
Also included in the revised Guidelines is a requirement that licensees submit copies of audit reports, at least annually, on material outsourcing arrangements to the Bank.
Continued Central Bank Supervision
Included in the revised Guidelines is a new section, which highlights the Bank's requirements vis-a-vis its ability to continue to supervise outsourced functions. The Bank also makes clear the circumstances where it may require a licensee to modify, make alternative arrangements or re-integrate an outsourced function into its operations.
The Bank intends to implement the revised Guidelines beginning on June 17, 2009. However, in the interim, licensees are invited to submit comments or questions seeking clarification to the Policy Unit by June 12, 2009.
The Policy Unit
Bank Supervision Department
The Central Bank of The Bahamas
Frederick & Market Streets
P.O. Box N 4868
Nassau , Bahamas
