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Outsourcing Failures leave Raphaels Bank with £1.89m Fine

Raphael & Sons plc (the “Bank“) has been hit by separate fines from the Financial Conduct Authority and the Prudential Regulation Authority (together, the “Regulators“) of £775,100 and £1,112,152 respectively.

An IT issue with one of the Bank’s third party card processor’s left over 3,300 customers unable to use their prepaid cards on Christmas Eve in 2015.

This event crystallised the risks that the Bank had failed to manage, but the Bank’s failings went deeper than that. The Regulators found that the Bank, “failed to have adequate processes to enable it to understand and assess the business continuity and disaster recovery arrangements of its outsourced service providers” but the management failings and oversights came from “Board level down“.

There was an absence of processes, flaws in the Bank’s due diligence (both initial and ongoing) and an overall lack of consideration of the risks of outsourcing. The Bank’s systems and controls were inadequate and exposed its customers to a serious risk of harm.

These failings continued from April 2014 through to the end of 2016. The Regulators’ investigation found that there was a previous incident in 2014, which should have led to the Bank resolving the issues then. The Regulators have stated that the repeat failings of the Bank were an aggravating factor in this case, which led to an increased penalty.

Nevertheless, the Bank’s co-operation with the Regulators resulted in a 30% reduction of the fines imposed, which would have otherwise totalled over £2.7m.

Comment

This regulatory investigation highlights the level of internal governance and controls required for any outsourcing arrangements, and the serious risks involved if these are insufficient.

Regulators are becoming more and more concerned with the “operational resilience” of firms, particularly after some recent high profile failures (the chaos caused by TSB’s IT upgrade issues last year, to name just one). Both Regulators have identified this topic as one of their priorities this year, which they state should be “viewed as no less important than financial resilience“.

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Garon Anthony, Squire Patton Boggs, litigation attorney
Partner

Garon Anthony is a partner in the Litigation Practice Group. He has specialised in dispute resolution work since he qualified as a solicitor and has considerable experience in general corporate and commercial litigation work, acting for both private and public sector clients.

Garon regularly resolves disputes for clients in the financial services/insurance sector. That encompasses professional negligence, fraud issues/recovery processes, dealing with claims and complaints by customers of the mis-selling of retail products, handling insurance policy coverage disputes for corporate...

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Rose Chaudry, Squire Patton, Commercial Litigation Lawyer, Tortious Contracts Attorney
Associate

Rose Chaudry is an associate in the Litigation team with expertise in general commercial litigation. Rose qualified in September 2015 after completing her training contract with the firm.

Rose regularly acts for a diverse client base, including individuals and companies, from SMEs to PLCs. Rose has experience advising on a wide-range of matters of both a contractual and tortious nature, including breach of contract, breach of warranty, debt recovery, professional negligence and insurance.

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