A recently published newsletter from the European Central Bank’s Single Supervisory Mechanism has revealed just 12% of material outsourcing contracts are compliant with EU outsourcing regulations, as UK financial institutions were urged to ensure compliance by an industry expert.

The update highlighted that an increasing number of banks are using third-party providers to support their critical functions. However, due to a lack of compliance the ECB warned that correcting the contractual processes of financial firms to ensure compliance with the regulations is now a priority and it is taking steps to address the ongoing issues.

The findings should be considered a warning to UK based firms as similar analysis could be carried out by the Financial Conduct Authority (FCA), said Mhairi Mival, outsourcing expert at Pinsent Masons, in a briefing note on 15 March.

“Although this is a statement from the ECB, the FCA could take similar action to review and so UK based banks subject to supervision from the FCA should also undertake a similar activity, if they haven’t already,” she said.

According to the ECB newsletter, of noncompliant contracts, 20% have not been subject to a proper risk assessment, and 60% have not been audited. This lack of oversight and compliance poses a significant risk to the stability of the financial system as well as posing risks to customers, the ECB warned.

The use of third-party providers can provide many benefits to banks, including things such as cost savings, increased efficiency, and access to specialised expertise. However, it is essential that banks carefully manage these relationships to ensure that they are compliant with regulations and that risks are properly managed.

Mival said: “Financial firms who are subject to supervision from the ECB should be checking that their material outsourcing contracts have been reviewed and are compliant with European Banking Authority outsourcing guidelines and amending them if not. This includes intra-group arrangements.”

Intra-group arrangements occur where a firm enters into an outsourcing arrangement with a company in the same corporate group, including cross-border outsourcing to a parent company based outside of the UK.