The Australian Prudential Regulation Authority (APRA) has warned general insurers they will need to seek permission before entering into so-called off-shoring arrangements.
APRA’s chairman, John Laker has used a speech to the industry in Sydney to make clear that while the regulator is not opposed to either outsourcing or off-shoring it does have concerns about the inherent risks in Australian deposit-taking institutions referring business overseas.
He described off-shoring as a growing phenomenon in the Australian financial services industry involving outsourcing business activities to a provider outside Australia where material elements of a service are provided from abroad.
“APRA does not wish to discourage prudently structured off-shoring arrangements but it does expect institutions to consider the additional and specific risks involved,” Laker said.
He said one of these risks was country risk – the risk that overseas economic, political and/or social events would impact upon the ability of the overseas service provider to continue to provide services to the institution.
“Another is compliance (legal) risk – the risk that off-shoring arrangements will impact upon the institution’s ability to comply with relevant Australian and overseas laws and regulations,” Laker said.
He said another, less obvious risk, but one that was relevant to both the regulated institution and APRA, was access risk – the risk the institution may not be able to obtain information or retain records or that APRA might not be able to access the service provider and the business activity being conducted.
“Because of the different scale and dimension of risks in off-shoring, we are proposing that general insurers obtain APRA’s approval prior to entering into any material off-shoring arrangements,” Laker said. “This is one stable door we don’t want to reach late.”
