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‘Dear CEO’ letter to asset managers

FSA highlights outsourcing risks

The Financial Services Authority (FSA) wrote to CEOs of asset manager firms in December, asking them to review the viability of their contingency plans for third party service provider failure. Specifically, they require a clearly defined and realistic continuity strategy in the event of provider failure. Unrealistic plans may include bringing functions back in-house, attempting to exercise step-in rights, or simply assuming that such institutions will be bailed out.

Many firms believe that the very significant practical difficulties of managing these risks outweigh the benefits, especially given that many firms would be similarly impacted by a failure, and chaotic markets may prevent trading altogether. Some worry that retaining real resilience defeats the business case for outsourcing, ultimately disadvantaging the client. The letter is clear that these positions are not sustainable.

Reducing the height of the hurdle

The regulator recognises the practical difficulties and there remains uncertainty about the height of the hurdle asset managers need to overcome. Nevertheless, the following key points have been established and can provide a basis for sensible action:

  • Some firms are not in a satisfactory position today, and those that have recently found comfort in this area may find expectations have moved upward.
  • A 'middle tier' of outsource providers often present disproportionate risk as a result of running a critical (and potentially hidden) function, but with relatively weak resilience and oversight.
  • The interaction between the outsource providers' regulated Recovery & Resolution Plans (RRPs) and those of the asset managers provides an opportunity for increased leverage over providers.
  • Good contingency plans require options, clear triggers, defined actions, known timescales and implications, identified resources, and known barriers and assumptions.  

The Deloitte approach to contingency planning

Deloitte has a host of experience in helping leading organisations develop and test contingency plans incorporating monitoring stages, triggers and clearly defined actionable steps. Our experience includes:

  • Financial monitoring: Integration of an ‘early warning’ financial monitoring framework with clear contingency actions to allow appropriately scaled responses to events.
  • Joint planning: Plan effectiveness has been strengthened by working with key third parties to jointly develop and agree contingency plans.
  • Simulations: We have used simulations to help clients define strategy, practice roles and responsibilities, stress test triggers and drive out false assumptions.

For example, Deloitte helped a UK regulator to develop contingency plans for the failure of a regulated entity. Detailed plans included actions to be taken both prior to and following the failure of a company and were based on agreed escalation and trigger points. To ensure plan effectiveness we worked with third party stakeholders to establish credible assumptions and triggers. Finally, simulations were used to test and challenge plans.

Further experience in contingency planning includes helping organisations establish plans for a potential break-up of the Euro and working with major UK and US banks to determine and test RRP strategies required by the FSA.


Please contact Rick Cudworth, Jon Pumfleet or David Mortimer if you would like to discuss these or other resilience issues for asset managers.

Rick Cudworth
Lead Partner, Resilience
020 7303 4760

Jon Pumfleet
Lead Director, ERS - Investment Management
020 7007 1647

David Mortimer
Senior Manager, Resilience
020 7303 4818

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