Failure to meet requirements – Case study
Failure to comply with the regulatory expectations for outsourcing and other third-party agreements can have significant adverse business and regulatory implications.
Case study: R. Raphael & Sons PLC (Raphaels)
On 12th November 2015, the Prudential Regulation Authority (PRA) issued a Final Notice to R. Raphael & Sons PLC (Raphaels) for contravening Fundamental Rule 3 contained in the PRA’s Rulebook and levied a fine of £1,825,950. The PRA took enforcement action against the firm for the following:
- No outsourcing agreement was entered into at the outset of the Joint Venture (JV) with Company C for the outsourced activity.
- Raphaels failed to enter into a written agreement regarding outsourced important operational functions until 21 months after Company C had commenced providing some of Raphaels’s finance functions.
- Raphaels did not manage the risks associated or oversee the outsourced important operational functions.
- The agreement entered into did not include any division of responsibilities and powers and did not accurately capture the extent of the services that were provided by Raphaels group companies.
- The PRA described the agreement as “materially deficient in setting out the rights and obligations of the respective parties“.
- The agreement did not specify appropriate arrangements for Raphaels’s oversight of the outsourced functions. Specifically, it neither established a mechanism or terms for Raphaels to supervise the group companies efficiently or at all nor set out service level agreements (SLAs) or means of measuring the effectiveness of the outsourced function.