I hope you are all well in these challenging and unprecedented times. In this short video we are going to talk through some of the key issues we have seen firms face in an outsourcing context in light of the COVID-19 pandemic and the pressures it is putting on third party service providers.
Just to set the scene and provide some background on the broader context in which these regulatory obligations arise, the FCA expects all firms to have business continuity arrangements and contingency plans in place to deal with major operational disruptions. The FCA’s expectations for firms in an outsourcing context sits within this broader regulatory framework – COVID-19 poses a lot of challenges to the way that these frameworks work. There has been no indication from the FCA or PI to date, but they are looking to adapt their regulatory approach in light of COVID-19, however we know from firms we are working closely with that the FCA and PRA are taking a proactive approach to discussing contingency plans and operational resilience frameworks with firms at this time and as part of that, outsourcing arrangements are, you know, becoming quite a key component of the way that the regulator is thinking about things.
We will now go on to explore some of the key issues that firms are facing in this context.
Firstly, assessing what contracts are critical. The approach firms take to various contractual obligations will depend on whether or not those frameworks are considered to be critical to the firms business. From a UK perspective, a material or critical outsourcing is an outsourcing of services of such importance that weakness or failure of the services would cast doubt on the firm’s ability to continue to satisfy the threshold conditions, or the principals. The COVID-19 outbreak has led to some firms reassessing the basis upon which they conclude that certain contracts with third parties are critical. For example, prior to COVID-19 firms may not have considered services such as cleaning, security, the catering, to be critical for the firms business, but in light of the pandemic we have seen firms reconsider the basis upon which they consider certain contractual arrangements to be critical and many have, for example, considered cleaning services to be critical during the pandemic.
Secondly, firms should validate their processes for assessing the risks, posed by third party contracts. COVID-19 is requiring some firms to retest the systems they have in place to assess the risk associated with third party contractual arrangements, in order to ensure they’re effectively able to respond to market pressures. Firms outsourcing critical services should be monitoring their outsourcing arrangements closely, as regulated firms remain responsible for compliance with the regulatory requirements. In the event that the operations of the outsource provider are impacted by COVID-19, such that they can no longer meet their obligations under the arrangements, the regulator firms should takeswift action to ensure continuity of business. The systems that are in place to monitor contractual arrangements should ensure that the firm can satisfy this obligation.
Thirdly, firms should consider whether it is appropriate to grant any sort of relief from contractual obligations. If suppliers are unable to perform their obligations under the contract, firms should consider what approach they want to take. The impact of triggering a force majeure event will depend on the governing law of the relevant contract. But from an English law perspective, common consequences of triggering a force majeure event includes suspension of contractual obligations, non-liability, extension of time to fulfil obligations, renegotiation of terms, obligation to mitigate losses and the right to terminate the contract. To benefit from these effects recent case law suggests that the party looking to be excused must have been ready and willing to perform the contract had it not been for the force majeure event. To the extent firms are considering how to apply force majeure provisions, they should review the wording of force majeure clauses and consider the consequences of triggering a force majeure event and also it might be worth contacting counter parties of contracts which may be affected to discuss potential renegotiation or postponement of obligations as appropriate.
Finally the interplay with SMCR. The FCA and PRA do not require, or expect firms to designate a single SMF to be responsible for their COVID-19 response and there’s no one-size–fits-all approach. Where firms have an SMF 24 the Chief Operations Officer, aspects of the firm’s response to COVID-19 may naturally sit with this SMF – this could include compliance with requirements and expectations on outsourcing and business continuity. The approach that firms take to managing the risk of coronavirus, including furloughing staff, should be considered in light of the responsibilities that such individuals have the critical areas of the firms operations, including the way that outsourcing arrangements and oversight are managed and maintained.
We hope this has helped to set the scene and provide some background on the key issues we are seeing firms dealing with. Please do reach out if you have any questions on any of the points raised in this video as we would be delighted to assist.
Thank you very much for watching and we hope you keep well.