4
Outsourcing of investment activities
4.1
When outsourcing investment-related activities, firms are subject to Chapter 7 of Conditions Governing Business, which sets out requirements for outsourcing in general. Rule 7.1 states that ‘if a firm outsources a function or any insurance or reinsurance activity, it remains fully responsible for discharging all of its obligations under the rules and other laws, regulations and administrative provisions adopted in accordance with the Solvency II Directive’.
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4.2
As such, firms that wholly or partially outsource their investment function themselves remain subject to the requirements of the PPP. Firms must ensure that any external investment manager only invests their assets in accordance with the PPP. Boards must be aware of any outsourced investment activities and must monitor, regularly review and be satisfied that these align with the firm’s strategy, strategic asset allocation and risk appetite.
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4.3
The PRA expects that firms will undertake appropriate due diligence in relation to outsourced investment activities. A firm’s risk function should have the ability to understand and manage the specific risks associated with outsourcing its investment function or parts of its investment function. Additionally firms should be confident that any external party has sufficient risk management expertise to comply with this SS.
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4.4
Article 274 of the Solvency II EU Delegated Regulation applies for outsourced investment functions/activities. For the purposes of this article, the PRA would normally expect ‘investment’ to be regarded as a ‘critical or important operational’ function or activity. Consistent with the European Insurance and Occupational Pensions Authority (EIOPA) Guidelines 60 and 63 (System of governance), firms should identify a process to determine which functions and activities are critical or important.[36] The PRA would expect to challenge firms to explain their reasoning if as a result of this process they determine that investment functions are not ‘critical or important’.
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