Termination rights in bank outsourcing: EBA clears up uncertainty

The supervisory body clarified the scope of its outsourcing guidelines following a query raised by Pinsent Masons, the law firm behind Out-Law.

The guidelines contain a specific section on termination rights. That section includes the EBA's expectation that financial institutions make express provision in their outsourcing agreements for the possibility for terminating that agreement, and outlines a series of examples of situations in which the contract should enable the termination right to be triggered. Some of those examples include where the service provider breaches "contractual provisions", "where impediments capable of altering the performance of the outsourcing function are identified", and "where there are material changes affecting the outsourcing arrangement or the service provider".

It also states that the outsourcing arrangement "should facilitate the transfer of the outsourced function to another service provider or its re-incorporation into the institution or payment institution", and further lists provisions to underpin this requirement that financial institutions must include in the written outsourcing contract.

However, Luke Scanlon of Pinsent Masons said it was not clear from the wording in the guidelines whether the section on termination rights applied to all outsourcing arrangements financial institutions enter, or just to the outsourcing of "critical and important functions". The guidelines explicitly state that these termination rights should be included "at least" in contracts for the outsourcing of "critical or important functions".

The EBA has now clarified that the specific guidelines relating to termination and exit apply only to contracts for the outsourcing of "critical or important functions".

"While it seemed reasonably clear what the intention of the EBA was in this case, when reading the wording it could have been interpreted either way," Scanlon said. "The EBA's clarification is a welcome and sensible conclusion."

"The EBA's 'Q&A' mechanism is a useful tool that both financial institutions and their suppliers should keep in mind when issues of practical application of the EBA's regulatory guidelines are open to interpretation. Obtaining clarification on issues in relation to the EBA's outsourcing guidelines can help reduce the cost and effort in negotiating outsourcing contracts," he said.

"It is to be hoped that the EBA and other regulatory bodies can benefit from increased resources to enable answers to queries raised to be provided to businesses speedily – notwithstanding the other priorities of the EBA, the challenges posed by Covid-19 and the need to prepare ahead of the end of the Brexit transition period, in this case it took nearly 18 months to obtain a response," Scanlon said. "We will continue to engage with the regulator on issues of importance and concern to our clients."