Similar to the trend in other parts of the globe, the need for expertise in extremely fast developing information technology as well as cost efficiency concerns have increased the number of financial institutions in Turkey willing to outsource their financial services. Foreign investments in the Turkish banking and financial system can also be deemed as a supporting element increasing this trend. Foreign investors would like to set-up outsourcing arrangements in Turkey similar to those set up in their own countries or in other jurisdictions where they do business.
The Banking Act No. 5411 ("Banking Act"), and the secondary legislation issued by the Banking Regulation and Supervision Agency ("BRSA"), sets forth guidelines on outsourcing. Further, the BRSA is determined to follow global trends and establish principles to better mitigate the concerns and risks surrounding the outsourcing system.
Banking Act
Article 3 of the Banking Act sets forth the definition of service providing institutions. According to this definition, service providing institutions may provide services to banks as an extension of, and complementary to, core services within the framework of the principles to be set by the BRSA in a separate regulation.
The Banking Act states that the principles and procedures applicable to service providing institutions, as well as the types of services that can be outsourced, shall be determined and set by the BRSA in separate regulations. These new regulations have not yet been enacted. Enactment is expected to occur by 1 November 2006. Nonetheless, the prospective regulation is expected to be in compliance with BASEL II rules and regulations.
With respect to bank confidentiality obligations, the Banking Act provides that, although a confidentiality obligation shall also apply to the institutions from which banks procure outsourcing as well as to the employees of such institutions, the exchange of information between credit institutions, financial institutions and service providing institutions under written contracts for the procurement of services to monitor, evaluate and control the risk status of clients and for providing customer services shall not breach the bank confidentiality obligations.
Regulation on the Information Systems Audit to be Carried Out by Independent Audit Firms at Banks ("Information Systems Audit Regulation")
The Information Systems Audit Regulation was issued on 16 May 2006. According to this regulation, information system audits are realized under three categories:
1) audit of application programming;
2) audit of general control areas, which comprise the audit of:
- planning and organization activities,
- supply and application activities,
- service and outsourcing activities,
- monitoring and evaluation activities (this audit also includes audit of compliance with legislation); and
3) a wide scope audit of the two areas above at the same time.
An application programming audit is required every year, whereas an audit of the general control areas is required once every two years. These periods, or the scope of the audit, may vary based on the discretion of the BRSA.
The Information Systems Audit Regulation states that the audit company will consider how the outsourced services affect the information systems and the financial data production processes, and conduct its audit accordingly. The audit company is also authorized to ask for, and evaluate, the audit reports prepared regarding the outsourcing company.
The Information Systems Audit Regulation further provides that if the bank carries out certain activities through outsourcing, then the audit contract to be signed between the bank and the audit company should include provisions ensuring meetings and discussions to be held between the audit company and the outsourcing company.
Regulation on the Banks’ Internal Control and Risk Management Systems ("Risk Management Regulation")
The Risk Management Regulation regulates outsourcing and information systems of banks. The Risk Management Regulation states that, in order to ensure proper-functioning of internal control functions and to satisfy information needs, a reliable and efficient management information system, to enable storage and use of data and other information in electronic form, must be established. The information must be reliable, timely, accessible, and provided in a consistent format. All precautions should be taken to ensure that the information is only accessible by authorized personnel and to ensure compliance with current rules and regulations regarding secrecy.
In order to prevent any negative effects on their ability to provide basic financial services, the Risk Management Regulation requires banks to establish plans regarding their information systems and other necessary systems to ensure the continuity of their activities and to periodically test these plans by also considering alternative outsourcing options.
It is likely that the BRSA will first consider issues relating to outsourcing in order to determine whether the planned outsourcing should be considered as a part of the core banking business itself, not an extension or complementary of such services, and therefore, should be dealt with by the bank itself in Turkey. If the planned outsourcing cannot be deemed as a part of the core banking business itself, and is rather an extension of or complementary to such services, then the second issue may be the benefit of providing such services through an outsourcing company in Turkey.
Also, discussions and confirmations with the regulatory authorities are still helpful tools to understand the approach of the BRSA as to how far the scope of outsourcing can be extended because the BRSA regulations have been recently enacted and more are expected. The actual practice after the issuance of the Information Systems Audit Regulation may also assist as a guide in the future in this respect because financial companies will be subject to detailed audits regarding their IT systems.
In the past practice, regulatory authorities emphasized the importance of their "access" rights with respect to outsourced services. We understand that the access that the regulatory authorities are usually referring to can be both to the "information", but also to the system where such information is kept in order to have the opportunity to intervene and seize the information and the system to implement their duties, if and when necessary. We will see in the near future how the BRSA will develop its practice in light of recent global trends.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.