Sourcing Speak

On 1 January 2013, over 4 years after the idea was first discussed, new Binding Corporate Rules (BCRs) for data processors were launched following a meeting of European data protection authorities.

BCRs are internal codes of conduct which companies within a group can “sign up to” regarding data privacy and security to ensure that transfers of personal data outside of Europe will meet European rules on data protection. Whilst BCRs have been an option for data controllers to ensure compliant transfers from Europe for some time, the introduction of BCRs for processors have been welcomed with open arms by both data controllers and data processors alike.

As a result of this change, processors, such as IT outsourcing providers, cloud providers and data centre providers, who implement BCRs will be able to receive data in Europe from their controller clients and then transfer that data within their group, outside of Europe, whilst complying with European privacy rules. For processors who choose BCRs to ensure compliance, this development could significantly reduce managerial time (and paper) spent negotiating often complicated, data protection safeguards for each and every data processing activity they carry out, whilst also doing away with the supervision associated with such contracts once they are up and running. At the same time, this development offers controllers’ clients comfort in the sense that controllers will be able to more simply demonstrate that their processing activities comply with European laws by pointing to an approved set of BCRs.

The FSA has written a ‘Dear CEO Letter’ expressing concern that the asset management industry may not have “effective recovery and resolution plans” in place should an outsourcing provider face financial distress or severe operational disruption which could lead to client detriment. The full text of the 11 December 2012 letter appears here.

The FSA states that firms’ Boards must consider the implications of outsourcing to a third party supplier and the regulatory requirements that apply. The FSA calls on firms to exercise “due skill and care and diligence” whenever they enter into, manage or terminate any outsourcing arrangement.

The FSA’s letter highlights its growing concern about the risks associated with asset management firms which outsource operational activities to third party providers. The FSA has been looking at firms’ contingency plans and has concerns about a number of them. These concerns include asset managers relying on the fact that an outsourcing firm is part of a financial institution that is deemed too big to fail. The FSA says that this approach is imprudent, as the FSA might actually allow such institutions to fail.

The Federal Communications Commission (FCC) is considering whether to make fundamental changes to how carriers (and ultimately their customers) pay for federal programs that provide greater access to telecommunications and Internet services. The dilemma facing the FCC is that Universal Service Fund (USF) program expenses are increasing, while interstate and international telecommunications revenues, the source of the funding, are on the decline. Facing a carrier contribution rate that is now 17.4 percent – a hefty rate in any economy – the FCC is looking at alternatives to revenues, including assessments based on telephone numbers or network connections.

No one disputes the laudable goals of USF. These include funding for: a) carriers who provide free or low cost telecommunications services to the poor; b) high cost telephone companies so that customers in rural and remote areas can access telecommunications at rates similar to customers in the cities; c) schools and libraries to get discounted rates for essential telecommunications services; and d) telecommunications services for rural health care providers. In 1998, these programs cost about $3.9 billion. In 2012 the cost will be more than $9.5 billion. The FCC has taken steps recently to cap or slow the growth of these programs, and put in place rules and regulations to reduce fraud, waste and abuse.

The growth on the expense side has put added pressure on the revenue side – all of which comes from carriers providing interstate and international telecommunications and VoIP services. As a result of the declining cost of telecommunications services combined with reduced demand because of email and free voice services, there has been a reduction in assessable revenues from 1998 to 2012, from $80 billion to about $66 billion. Accordingly, the contribution factor has risen from 3.19 percent in 1998 to 17.4 percent today. The FCC adjusts the contribution factor quarterly.