Understanding The Cyber Security Risks Of Outsourcing And Remaining FCA Compliant 

Outsourcing; it’s pretty flipping useful! It can help you to streamline your day-to-day operations, cut costs, and tap into specialised expertise without having to bring in an additional employee.  

 However, for financial firms, particularly those regulated by the Financial Conduct Authority (FCA), outsourcing comes with a particular set of challenges and risks, particularly when it comes to cyber security. That’s not to say you should never outsource again, instead you need to make sure you’re doing it in a safe way. So, how do you do that? Keep reading to find out. 

Understanding regulations 

Chances are if you clicked on this blog, you’re already all clued up on what FCA compliance is, in which case you can go ahead and skip further down this blog. But for those who aren’t in the know, here’s a quick summary.   

The Financial Conduct Authority (FCA) places strict requirements on regulated firms when it comes to outsourcing. This is primarily to ensure the protection of consumers and the integrity of financial markets. Wrapping your head around and understanding these regulatory requirements is really important for firms seeking to outsource while remaining compliant.  

What are the cybersecurity risks of financial firms outsourcing?  

Now we’re all on the same page about what those regulations mean, what are the actual issues that can rear their ugly heads when it comes to outsourcing? Well, as we mentioned earlier, the key ones are surrounding cybersecurity and include: 

Data security and confidentiality concerns

Outsourcing sensitive things such as data processing or storage raises some big concerns when it comes to data security and confidentiality – and rightly so. Without the correct safeguards, firms are vulnerable to all sorts of nastiness like unauthorised access, valuable information being stolen and other data breaches, which can not only cause their customers to lose trust in them but can even lead to legal consequences.  

Transparency and accountability challenges

Maintaining transparency and accountability to regulatory authorities becomes challenging when outsourcing critical functions; after all, things tend to get more confusing with more voices involved, particularly outside voices. Firms must ensure they put clear contractual agreements in place with outsourcing partners and establish protocols for regulatory reporting and compliance monitoring. 

Loss of control over critical functions 

Outsourcing essential services like IT infrastructure, compliance functions, or even customer support can lead to a big loss of control when it comes to critical functions. Without the proper oversight in place, firms risk operational disruptions and compliance breaches. 

How to remain FCA compliant whilst outsourcing  

Now before you get in a panic and burn all of your outsourcing contacts, it is still possible to outsource and remain safe and complaint. It just takes a little extra work. 

Thorough vendor due diligence 

This is a pretty obvious one, but worth including. Before using any outsourcing partners, firms must do their research to check out their expertise, regulatory compliance, and financial stability. This includes evaluating their track record, security measures, as well as adherence to specific FCA requirements. 

Data protection laws

If you’ve chosen to outsource to a company that isn’t located in another country, it is vital that you get yourself clued up on whether that country has the appropriate data protection laws in place. You can’t just assume that their laws are the same as UK laws, particularly when it comes to things like GDPR and FCA regulations. 

Establishing clear contractual agreements 

We know; another obvious one but this is very important. Make sure you have clear contractual agreements in place which outline responsibilities, obligations, and compliance mechanisms. Contracts should also specifically address data security, regulatory reporting, dispute resolution, and termination clauses to ensure FCA compliance.  

Data transmission security 

We’ve covered a few obvious ones, but here’s a less obvious one you may not have thought about – data transmission security. If you’re sharing sensitive data across international borders, you need to make sure that the data transmission is secure.  

So, how the heck do you do that? There are multiple ways to do this, but common ways include, using a VPN, encrypting emails, and putting multi-factor authentication in place. If you’re unsure how to do this yourself, it’s best to consult with IT professionals (like us!) who can help you out. 

Incident response plan 

We get it, thinking about a cyber incident hitting your firm isn’t exactly fun, but having a plan ready for it if it does happen is so important. By having a plan of action, you can help reduce the potential harm caused by a cyber security breach involving your outsourcing partner. Your response plan should include procedures for notifying regulators, customers, and other relevant stakeholders, as well as measures to patch any holes in your cyber security measures immediately. 

Implementing ongoing monitoring and oversight 

It’s no good to outsource and then just never check in. Instead, firms should put systems and procedures in place that allow for ongoing monitoring and oversight of outsourcing relationships. This includes regular performance reviews, compliance audits, and risk assessments to ensure continued adherence to FCA regulations. Doing this will also ensure you can nip any issues or misunderstandings in the bud before they become a much bigger problem. 

Investing in employee training and awareness 

Employees play a huge role in maintaining FCA compliance when working with outsourcing partners. By investing in training and awareness programmes, you can make sure that your employees understand the risks associated with outsourcing and their responsibilities in upholding regulatory standards. 



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