When considering the minimum standard requirements for outsourcing contracts, we note the EBA retained Option B of defining a minimum content of outsourcing arrangements, rather than allowing “contractual freedom”. While this approach may seem to provide clarity, if a literal interpretation of the wording in section 10 is adopted without regard to the intent of the guidelines, this may dissuade both institutions and service providers from entering into critical outsourcing arrangements or at the very least increase the costs of such arrangements. The contractual phase is to manage the risks identified in the risk assessments conducted by the institution although we note that there is no context around the “contractual phase” to explain why the particular rights are required.
Our main concern is that the termination rights in section 10.4 might be considered prescriptive as to the exact wording to be inserted into the outsourcing arrangement. We believe the intent of the section is to enable institutions to exit arrangements where the supplier’s delivery and management of the outsourced services presents certain material risks to the institutions and its regulated business (for example: either security risks or the ability to supervise the outsourced function).
With regard to b) “identified impediments”” and c) “material changes affecting the outsourcing arrangement “and e) “weaknesses regarding the management and security of confidential data”; these may be factors outside the control of the service provider. The drafting does not reference the change in delivery by the service provider in each case leading to the situation. The situations could be interpreted to arise from changes at the institution but we are unsure of whether this is the intention of the EBA. Therefore it would be very helpful if further examples are given or the wording is clarified with more usual contract concepts. Alternatively, or in addition, a reference to the harm that the EBA is seeking to avoid should be added to aid understanding of when the required termination rights are applicable. The final situation e) (instruction of competent authority to terminate) is easily understood and verifiable by a service provider whereas we believe the other situations are of a more subjective nature and will be open to interpretation and dispute between the parties.
We believe the termination rights could be clarified by reference to the usual contractual concepts of:
• Material breach / material weaknesses;
• Degradation of the service or material alteration of the service as provided by the service provider;
• Ability to give notice of the perceived breaches / impediments/ changes / weaknesses and for a period to rectify rather than moving straight to a termination right.
In addition, we believe that the section should reflect and reference the relevant risks that the institution is seeking to guard against. There is a danger that such broad termination rights which are not specified to relate directly to the conduct of the service provider will lead to disputes.
Broad rights to terminate will introduce uncertainty to the service provider as to the duration of the agreement and what factors may lead to termination. We appreciate one example of sub-outsourcing or changes in sub-contractors is given but the wording could be interpreted much more broadly.
Service providers will need to consider the commercial model if such rights are agreed, which may include increased up front non-refundable fees; or exit fees. In some cases, it may mean that certain services should not be offered to institutions if the required investment cannot be recouped within a defined definite period. This we believe will lead to higher financial costs for the institutions in the fees paid to service providers and may thus indirectly be dissuasive to those wishing to adopt outsourced arrangements which can otherwise be a compelling offer.
More detailed comments are set out in our attachment.