APRA chief warns on outsourcing beyond regulation

The Australian Prudential Regulation Authority (APRA) chairman, Wayne Byres has pointed to the risk of banks and other financial institutions becoming heavily reliant on unregulated technology providers.

In a speech delivered in Sydney this week, Byres pointed to technology and outsourcing as representing major challenges for regulators such as APRA.

“Outsourcing and partnering are far from new concepts, but increasingly it is occurring for business-critical functions, not just at the periphery of activities,” he said. “Importantly, many of these new partners and providers of critical functions sit outside regulators’ reach.”

Byres said that, in such circumstances, the prudential supervisors’ ability to ‘kick the tyres’ would be much harder in future, without new tools and methods.

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“Two potential risks arise from this broader trend,” he said.

“The first is a possible fragmentation, as niche specialist providers disaggregate existing business models by performing specific roles and functions more efficiently and effectively than incumbents can do in-house,” the APRA chairman said. “An ecosystem of small providers will challenge management models, as well as regulatory understanding of risks, as more data and activity sits outside the (increasingly narrow) regulated entity.”

“It poses an interesting thought experiment: in the extreme, if all the processes in a bank were disaggregated into their specialist parts, which parts would we call ‘the bank’?”

“The second risk is, in some sense, the opposite – the systemic risk of an ostensibly large and diverse number of entities all dependent on just a few unregulated providers for critical services, creating a substantial concentration risk and increasing the threat of contagion in the event of a service failure,” Byres said.

He said that another challenge could come from the so-called TechFins – large technology companies moving into financial services.