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Outsourcing of banking activities

The competitive working environment and the need to focus on core activities force today's financial institutions to outsource some services, critical to their business, for which they have limited expertise and/or limited funds. Outsourcing offers a cost-efficient business by preventing time loss. The Banking Law and the related legislation recently enacted comprise provisions with respect to outsourcing in light of global trends. The Banking Law provides the definition of outsourcing companies (supporting service providers) in Article 3; however it leaves the details of application to the secondary legislation. The rules regarding the procurement of outsourcing services by banks and authorisation of the service providers – the Outsourcing Regulation, enacted on November 1 2006 – regulates outsourcing companies and the specifications of outsourced services.

In the Banking Law and the Outsourcing Regulation, outsourcing companies provide any services supplementary to or complementing the activities of the banks. But companies providing clearing, custody and central registration services are excluded from the scope of the definition. The Outsourcing Regulation does not expressly set forth the services that may be outsourced upon authorisation of the Banking Regulatory and Supervision Agency (the BRSA) as explained below; but it does list the services that may not be outsourced. Services other than the following may be outsourced to different companies:

  • clearing, custody and central registration services;
  • services mostly procured from external providers such as consultancy, marketing, security, catering, transportation, promotion of banking services, maintenance and repair of any hardware including automated teller machines (ATMs) and point of sale (POS) devices, scanning and transfer of banking and credit card application documents to electronic form, delivery of abstracts by hand, and cleaning, not supplementary to or complementary of the activities of the banks;
  • activities to be executed exclusively by the board of directors or the internal system units.

According to a recent amendment made to the Outsourcing Regulation and published in the Official Gazette dated July 24 2007, the Outsourcing Regulation provides a non-restrictive list of services such as call centres, maintenance of software services provided for information technologies, ATMs and POS device operations, imprinting of banking and credit cards, delivery of abstracts in electronic form, archiving and security services including counting, distribution, delivery, protection of cash, negotiable instruments and precious metals which can be defined as outsourcing services; however, the providers of such services are not obliged to be authorised by the BRSA. On the whole, the Outsourcing Regulation does not apply to such services; their providers are only subject to limited supervision of the BRSA, are bound by professional secrecy, and must purchase professional liability insurance to indemnify any losses arising from their activities.

Outsourcing in the banking sector is a highly regulated field. Banks wishing to procure such services are obliged to develop a risk management programme defining the services they require, expected benefits, allocation of audit, evaluation, reporting and security duties regarding such services, and a contingency plan in the event that such a service is interrupted. Before the execution of any agreement with outsourcing companies, banks must conduct an evaluation study within the companies as to whether they have the required technical equipment, financial structure, expertise, know-how and personnel for provision of the service. The technical adequacy report to be drawn from the evaluation study is submitted to the audit committee and to the board. When the board assesses the report and the audit committee gives its opinion, the board resolves to execute an agreement with the outsourcing company that it deems adequate.

Article 6 of the Outsourcing Regulation sets forth the required conditions for outsourcing companies, for example, a transparent corporate structure, enough technical expertise and hardware, permits and authorisations necessary for business and professional liability insurance. The Article also states that the shareholders, members of the board, auditors and managers must fulfil the requirements sought for the founding shareholders of the banks under Article 8 of the Banking Law.

Companies willing to outsource activities to banks must obtain permission from the BRSA. In an application to be filed with the BRSA, banks submit (i) the risk management programme; (ii) technical adequacy report; (iii) the relevant board resolution; (iv) detailed information regarding the outsourcing companies, corporate structure and backgrounds of board members, shareholders, auditors and managers; and (v) a notarised copy of the agreement executed with the outsourcing company (a draft agreement may be submitted if the agreement has not yet been executed). In any case, a notarised copy of the executed agreement is to be submitted immediately after execution. The Outsourcing Regulation sets out, in detail, the mandatory content of the agreements to be executed.

The authorisation to be granted upon the BRSA's evaluation of the submitted information and documentation is only valid for the applicant bank. The agreement enters into force upon the delivery of the BRSA's decision to the relevant parties.

The BRSA assumes an active role in every phase of the process. If the parties amend the agreement, except for the mandatory content enumerated under the Outsourcing Regulation, they must inform the BRSA of the relevant amendments within seven days. The BRSA itself is entitled to request any amendments if the provisions are not in compliance with the relevant legislation. Where the BRSA detects any activities of the authorised company that are not in compliance with the Banking Law or the Outsourcing Regulation, or if it does not fulfil the necessary conditions enumerated under the Outsourcing Regulation, or if the company fails to purchase professional liability insurance, the BRSA is entitled to request termination of the agreements. Following such a request, cancellation of the authorisation granted ensues.

Regulation of the information systems audit to be carried out by independent audit firms within banks – the Information Systems Audit Regulation – enacted on May 16 2006 and amended by a regulation published in the Official Gazette dated August 17 2006, governs the audit of the banks' information systems and financial data production. In the Information Systems Audit Regulation, the information system audit is conducted under three categories:

  1. Audit of application controls (every year);
  2. Audit of general control areas (every two years);
  3. A big audit of the above-mentioned areas.

The audit of the information systems of a bank is conducted by its independent audit firm, which is separately authorised by the BRSA to conduct the audit of the information systems (the Authorised Company). The BRSA is also entitled to cancel the authorisation, on a permanent or temporary basis, if the Authorised Company fails to comply with the provisions of the Information Systems Audit Regulation.

The Authorised Company also audits the outsourced services of banks, taking into account the effect of such services on the information systems and financial data production process. The Authorised Company is entitled to review and evaluate the information systems audit report drawn with respect to the outsourcing company. Where the relevant bank has outsourced some of its services, the Authorised Company provides that the agreement executed with the bank comprises provisions ensuring meetings with the outsourcing companies regarding audit issues.

Despite the fact that the Outsourcing Regulation includes detailed provisions with respect to the outsourcing, the practice remains ambiguous, as the BRSA has not clarified its approach on the scope of outsourcing. We will soon see how the BRSA distinguishes between the core services of banks and those that are complementary and supplementary to such core services.

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