Planning to Outsource a Function in Labuan International Business and Financial Centre (Labuan IBFC)?
- Is prior approval from Labuan Financial Services Authority (Labuan FSA) required?
- Is notification to Labuan FSA sufficient?
- Is the service provider a third party or part of a Group Shared Services (GSS) arrangement?
- Is the outsourced function material or non-material?
Why Does Outsourcing Matter?
To manage and mitigate outsourcing risks, the Labuan FSA issued the Guidelines on External Service Arrangements for Labuan Financial Institutions (the Guidelines) on 30 April 2020.
Do the Guidelines Apply to You?
For Labuan captive (re)insurers and Labuan captive takaful operators, including other LFIs not scoped under the Guidelines, the Guidelines represent good governance practices for managing outsourcing risks. These entities must maintain records of their outsourcing arrangements and submit them via Labuan FSA's Statistical Management System (SMS) portal. They must also ensure the information submitted is kept up to date.
What is Considered Outsourcing?
Therefore, the first step is always to determine whether the arrangement falls within the definition of an ESA.
How Does the Approval Process Work?
- Whether the outsourced function is material or non-material;
- Whether the service provider is a GSS provider or a third-party service provider; and
- Whether the outsourced function is an internal control or non-internal control function.
✔ Execute the agreement.
✔ Record the arrangement in the ESA Register.
✔ Report the arrangement through the SMS Portal.
The process ends here.
Further assessment is required.
Scenario A: Outsourcing to a Third Party
If the service provider is a third-party service provider:
✔ Prepare the required documentation
✔ Obtain approval from Labuan FSA
✔ Execute the agreement upon approval
✔ Submit the approved ESA to Labuan FSA via the SMS Portal
Scenario B: Outsourcing within the Group - GSS
If the service provider is a related company within the same group:
First, determine whether the outsourced function involves an internal control function, such as compliance, risk management, internal audit or actuarial functions.
Internal Control Function
✔ Submit notification to Labuan FSA
✔ If no objection is received within 30 days, proceed with execution
✔ Submit the ESA to Labuan FSA via the SMS Portal
Non-Internal Control Function
✔ Obtain Labuan FSA approval before execution
✔ Submit the approved ESA to Labuan FSA via the SMS Portal
Prior to undertaking any outsourcing arrangement, Labuan entities should not assume that a simple service agreement is sufficient. The nature of the outsourced function, the materiality of the activity, and whether the service provider is a related company or a third party will determine the applicable regulatory requirements. Maintaining a proper ESA Register and ensuring timely reporting to Labuan FSA are equally important components of ongoing compliance.
References:
- Guidelines on External Service Arrangements for Labuan Financial Institutions
- FAQs on Guidelines on External Service Arrangements for Labuan Financial Institutions
- Guidelines on Corporate Governance for Labuan Banks and Labuan (Re)Insurers
- Guidelines on Compliance Function for Labuan Financial Institutions
- Guidelines on Shariah Governance for Labuan Islamic Financial Institutions
Etiqa Offshore Insurance (L) (EOIL) Ltd is a licensed insurance manager and underwriting manager operating in Labuan IBFC. As a pioneer in insurance management services, EOIL provides management and support services to licensed Labuan entities.
EOIL is part of Maybank Ageas Holdings Berhad Group. The Group’s core operating entities are rated ‘A’ (Strong) for Insurer Financial Strength by Fitch Ratings, reflecting their strong business profile, capital positions and financial performance.
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