Concerned over the increasing trend of outsourcing of key services by market intermediaries to third parties, the Securities and Exchange Board of India (Sebi) on Wednesday floated a discussion paper inviting public comments to develop suitable guidelines for outsourcing by an intermediary. While admitting that it is not desirable to ban outsourcing completely, the regulator in its discussion paper stated that the concerns need to be addressed and the outsourcing needs to be organised in an orderly manner.
At present, few intermediaries like depository participants, stock brokers, portfolio managers, merchant bankers, registrar and share transfer agents are outsourcing some of their activities related to data entry, record keeping, despatch, front-desk customer services, KYC verification among other services to unregistered third parties.
According to the regulator since the intermediaries are registered based on their strength, outsourcing of key activities by them to unregistered third parties defeats the purpose of regulation and creates risk for the entire market. ?It is therefore felt that the key activities which are crucial to the intermediation service may be delivered by the intermediary itself. The informal feedback indicates that the compliance with securities laws, investor grievance redressal and KYC must not be outsourced under any circumstance,? stated the Sebi discussion paper.
Based on the principles advocated by IOSCO, an international governing body of securities market regulators globally, Sebi has listed out broadly nine principles for outsourcing of any intermediation services. Accordingly in cases, where the third party acts as an outsourcing agent for multiple intermediaries, the regulator stated that it is the duty of the third party and the intermediary to ensure that strong safeguards are put in place so that there is no ‘commingling of information /documents, records and assets’. Further the regulator has also proposed intermediaries to ensure that outsourcing arrangements neither ‘diminish its ability to fulfill its obligations to customers and regulators, nor impede effective supervision by the regulators’.
The discussion paper also talks about establishing a comprehensive outsourcing risk management programme to address the outsourced activities and the relationship with the third party. Additionally, it has also proposed that the board of directors or equivalent body representing the market intermediary should assume the responsibility for the outsourcing policy and related overall responsibility for activities undertaken under that policy.