This article first appeared in The Edge Financial Daily on September 29, 2017

KUALA LUMPUR: Bank Negara Malaysia (BNM) is in the midst of finalising a revised prudential framework for financial institutions that practice outsourcing.

The revision, said BNM in a statement on its website yesterday, was to ensure effective risk management practices by participating institutions, amid intensification of technological advances in a more globalised and digitised environment.

In the statement, the central bank highlighted the importance of “robust” risk management of outsourcing arrangements “to protect the critical role of financial institutions” in supporting financial intermediation and real economic activities.

“Concerns over risks associated with outsourcing arrangements have increased in recent years, particularly on cyberattacks and data security breaches.

“This has arisen from financial institutions becoming more dependent on technology and more interconnected with the broader and global financial system through shared services and market infrastructure,” it said.

As a result, BNM said financial institutions may have difficulties maintaining operational continuity of critical functions “under conditions of stress” in the future, due to over-reliance on service providers.

Hence, BNM said “the proposals in the exposure draft reinforce the bank’s expectations on broader governance and set out improved processes that must be in place to manage outsourcing arrangements”.

These include, among others, enhanced due diligence on service providers and stronger protection of data confidentiality, the central bank added.

“The bank also expects financial institutions to demonstrate that controls over outsourcing risk management arrangements are operating effectively and remain commensurate with risk profiles of financial institution.

“The revised requirements also ensure the bank’s continued ability to carry out effective supervisory oversight on financial institutions, including the increasingly complex outsourcing arrangements and concentration on a particular service provider,” said BNM.