Submission on the Reserve Bank outsourcing policy for systematically important banks.
31 January 2005
Background
Finsec is a registered trade union and has amongst its membership approximately 7,000 people who are employed by the banks that would be covered by the proposed policy.
These people are all employed by companies whose ownership is Australian based. This has meant significant changes for them in the way in which they do their work, their employment relationships, their security of employment and their relationship with customers.
The level of international ownership in the New Zealand Banking industry is amongst the highest in the world.
Off shoring has affected the industry to a limited extent and principally (at this stage) has been evidenced through the exchange of work functions between Australian parent companies and their New Zealand subsidiaries. It is worth noting that Professor Rene Ofreneo, of the University of the Philippines said at a recent Union Network International (UNI) Conference in Cebu, the Philippines that:-
"As many as five million jobs - including IT, finance and back office processing - are predicted to migrate from the USA and Europe over the next few years to India, the Philippines, China and elsewhere."
In an international context, outsourcing in the New Zealand banking industry is seen as being at the extreme edge of international experience. Many overseas banks are just beginning to contemplate outsourcing such services as couriers, messengers, catering, physical security, printing and so on. Outsourcing of these types of functions occurred well over a decade ago in New Zealand and has now migrated to what some would describe as mission critical areas of banking operations.
Comparatively then, outsourcing in the New Zealand industry is well advanced. We have various examples of processing, information and technology, call centre and retail (agency) functions that have been outsourced to independent third party suppliers or parent companies.
We note with interest recent speculation in both the Australian and New Zealand media about the possibility of work from Westpac in Australia moving to New Zealand because of our lower labour costs. We also note a proposal amongst major Australian banks to outsource much of their back office processing work to EDS. These current examples of thinking within the industry demonstrate that off-shoring and outsourcing are ongoing processes in the banking system that will in all likelihood accelerate further.
As identified in the proposed policy, these practices raise significant issues about both the security and control of the New Zealand banking system.
There are those who might argue that such a policy is unnecessary. We do not agree and whilst there are many examples of why it is necessary, for the sake of brevity we refer only to one. The case of Credit Agricole in Argentina where the bank simply 'upped sticks and left' its crisis behind it leaving many creditors, many people out of work and the country of Argentina to clean up the aftermath.
We also note the interest being shown by international regulators in this issue. In particular, the work of the Committee of European Banking Supervisors whose consultation document on these matters was released in April 2004.
We comment on the Reserve Bank of New Zealand's policy proposal as follows: -
Introduction
We strongly support the concept that systematically important banks should be incorporated in New Zealand and that the Outsourcing Policy should apply regardless of whether such a bank is operating as a subsidiary or branch.
Benefits and Costs of Outsourcing
Vulnerability of failure of service providers
The issue of heavy reliance on single service providers for mission-critical services is a real one in New Zealand. We have historic traditions of such reliance in our industry as evidenced by the past operations of Databank Systems Limited (latterly EDS) who provided transaction processing and information technology systems and services (and more) to systematically important banks in New Zealand right through until the 1990's.
Today, we see such critical operations as ANZ Bank's call centre operation being outsourced to a temping agency and significant elements of Westpac's Information Technology processes being outsourced to IBM.
Should such a service provider experience a critical failure, the impact on the bank's ability to continue to operate, ensure customers' access to funds and meet their reporting requirements would be in question.
Additionally, putting in place an alternative service (or service provider) quickly enough so as to minimise the impact of such a failure is highly unlikely in such areas because:-
- of the technical difficulties and incompatibilities
- of the absence of appropriately skilled employees
- of the scale of the service provided
Management of legal risk
The issue of legal responsibility must remain crystal clear in order to ensure customer confidence. For example, should a technological problem result in customer mortgages not being processed, customers must be confident that the entity responsible for this is their service provider (the bank), not their service provider's provider!
An emerging issue within banking globally is customers' rights to privacy. Outsourcing and off-shoring by their very nature leads to the transmission of confidential information provided by customers to one entity (their bank) to another without their permission and often without any legal safeguards.
An example of this could be the customer who calls their bank and finds the call being answered by an employee in Australia. That employee has all the information they need about the customer at their fingertips but any abuse or failure to maintain the privacy of that information is subject to the law of a different country. Who is responsible to ensure safeguards in New Zealand privacy law are upheld? How would a customer get the matter resolved?
Exactly the same issues arise in the IT area where a service provider to a bank may actually control and have access to the databases that hold customer information.
The issues of outsourcing and off-shoring when the service provider is a related party are important. Usually, when Banks are making decisions about shifting work or areas of functionality within their global enterprise, the predominant rationale adopted is one of cost savings across the single entity. We see little consideration being given to the impact of service failure on one part of their entity (in this case the NZ part) in favour of the more global consideration of this eventuality on the single entity as a whole.
The same problems around consideration are often evident when designing global HR policies and also when constructing reporting lines for management. It has not been uncommon in our industry for managers to have direct reporting lines to their Australian counterparts and only 'dotted line' reporting to their New Zealand business counterparts.
A requirement to keep regulators informed of material outsourcing plans is essential in order that the system of oversight and management remains a 'real time' one rather than a 'snap shot' one.
Model condition of registration - "stand -alone" capability
The requirement that boards of directors must have legal and practical ability to control the business such that it can operate on a stand-alone basis is essential to security of the New Zealand banking system and in providing consumer confidence.
All systematically important banks in New Zealand make much of their corporate social responsibility. In the event of a crisis or failure, their primary responsibilities should be to minimise the impact on its New Zealand customers and limit the impact on the wider New Zealand banking system.
Without the requirement to carry on business in a prudent manner meaning "within New Zealand" a parent company's main priority in a failure situation would be to manage the impact on the 'group' first, and the New Zealand entity second.
We note with interest that in this context, the term "systems" is defined broadly enough to include staff. We support such a move wholeheartedly although we note that this may be problematic. For example:-
Our members have (on several occasions) had to endure responses from their employer in collective bargaining that the employer cannot offer more because the company owners have either refused this or will not agree to the New Zealand entity exceeding its budget
The staff at the ANZ Contact Centre are in the main, employees of someone other than the ANZ Bank.
We strongly support the proposed factors for consideration and are pleased that the issues of impact on customers and their access to funds and products are addressed.
Proposed conditions of registration on management reporting lines
Given previous comments in this submission around reporting lines, we strongly support the requirement that the CEO be appointed and/or dismissed by the board.
We believe that a CEO who is primarily accountable to their parent company rather than the board of their New Zealand Bank has an inherent conflict of interest that would be exacerbated in a failure situation.
We accept that the judgements required by boards to satisfy themselves of adherence to this policy are complex and agree that the use of independent experts is a logical. We would however go further and say that we believe that there is a role for the Reserve Bank in reviewing these decisions.
Without such a requirement on the Reserve Bank, adherence to these policies and the prevention strategies they espouse rests entirely on trust based declarations and non-compliance may not become evident until it is too late, i.e. when failure occurs.
The only way to guarantee compliance is for the Reserve Bank to have an auditing capability where it can audit the decisions made either assure itself of compliance or question the decisions made and require remedial action.
