Guidelines on Outsourcing of Activities by Intermediaries
Summary
This circular establishes guidelines for the outsourcing of activities by SEBI-registered intermediaries to ensure high standards of service and due diligence. It defines outsourcing, prohibits the outsourcing of core business activities and compliance functions, and mandates reporting of suspicious transactions to the FIU. The document further outlines principles for outsourcing policies, risk management, and self-assessment requirements for existing arrangements. The intermediary retains full liability and accountability for outsourced activities, ensuring investor rights remain unaffected. Outsourcing arrangements must be governed by written contracts that define rights, responsibilities, and regulatory access. Intermediaries are required to conduct due diligence, maintain contingency plans, and protect confidential information.
Text
SEBI Regulations for various intermediaries require that they shall render at all times high standards of service and exercise due diligence and ensure proper care in their operations.
Outsourcing may be defined as the use of one or more than one third party – either within or outside the group - by a registered intermediary to perform the activities associated with services which the intermediary offers.
Based on the feedback received on the discussion paper and also discussion held with various intermediaries, stock exchanges and depositories, the principles for outsourcing by intermediaries have been framed (Annexure I). These principles shall be followed by all intermediaries registered with SEBI.
The intermediaries desirous of outsourcing their activities shall not, however, outsource their core business activities and compliance functions.
Regarding Know Your Client (KYC) requirements, the intermediaries shall comply with the provisions of SEBI {KYC (Know Your Client) Registration Agency} Regulations, 2011 and Guidelines issued thereunder from time to time.
The intermediaries shall be responsible for reporting of any suspicious transactions / reports to FIU or any other competent authority in respect of activities carried out by the third parties.
In view of the changing business activities and complexities of various financial products, intermediaries shall conduct a self assessment of their existing outsourcing arrangements within a time bound plan, not later than six months from the date of issuance of this circular and bring them in line with the requirements of the guidelines/principles.
This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
An intermediary seeking to outsource activities shall have in place a comprehensive policy to guide the assessment of whether and how those activities can be appropriately outsourced. The Board / partners (as the case may be) {hereinafter referred to as the “the Board”} of the intermediary shall have the responsibility for the outsourcing policy and related overall responsibility for activities undertaken under that policy.
The policy shall cover activities or the nature of activities that can be outsourced, the authorities who can approve outsourcing of such activities, and the selection of third party to whom it can be outsourced... The policy shall be based on an evaluation of risk concentrations, limits on the acceptable overall level of outsourced activities, risks arising from outsourcing multiple activities to the same entity, etc.
The Board shall mandate a regular review of outsourcing policy for such activities in the wake of changing business environment. It shall also have overall responsibility for ensuring that all ongoing outsourcing decisions taken by the intermediary and the activities undertaken by the third-party, are in keeping with its outsourcing policy.
The intermediary shall establish a comprehensive outsourcing risk management programme to address the outsourced activities and the relationship with the third party.
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Source: SecMarx — Guidelines on Outsourcing of Activities by Intermediaries. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.