As cloud-based outsourcing rises, financial regulations evolve
Banks, regulators and cloud-based providers are forging new models for outsourcing in the financial sector.
In an environment in which banks face a growing imperative to invest in technology, outsourcing is a way for them to improve the quality of their IT systems and control costs.
As they seek to make greater use of outsourcing, banks are navigating not only the technology changes underway in their own industry, but also the industry-wide shift in technology toward software-as-a-service delivered through cloud-based solutions. And while keeping those plates spinning, banks must also deal with ever-increasing regulatory scrutiny, particularly government scrutiny of the risks inherent in the banks’ IT infrastructure.
A significant area of concern for banks is the degree of regulatory fragmentation they face in implementing global cloud outsourcing agreements. Within large financial institutions, there may be banking and asset management operations that are subject to different rules and require bespoke contractual provisions and procedures in order to arrive at a group-wide outsourcing solution that allows all the entities to comply with their respective regulations.
The issue of geographic splits in regulation is another hurdle. Even within Europe there is divergence because outsourcing rules are based on a directive, not a regulation. This allows some leeway for national governments to interpret the directive and for supervisors to decide how to apply it.
Beyond the European Union, further issues arise, particularly in Asia, where some jurisdictions have extremely complex rules (on how data is handled, for example) that are not well-adapted to cloud-based services. Regulation can make it impossible to host certain customer data outside national borders, potentially limiting the scope to employ cloud solutions.
While banks continue their cloud evolution cautiously, regulators are slowly adapting their thinking to accommodate cloud-based outsourcing and developing new guidance, while cloud providers that serve businesses across sectors are also becoming more familiar with the demands of working with clients in highly regulated businesses.