In the bid of ensuring that banks and financial institutions in Tanzania do not enter into outsourcing arrangements with abandon, the Bank of Tanzania (BoT) issued the Outsourcing Guidelines for Banks and Financial Institutions, 2021 on 17 June 2021 (the New Outsourcing Guidelines). The New Outsourcing Guidelines have replaced the Outsourcing Guidelines issued in 2008 (the 2008 Outsourcing Guidelines).
The key underlying principle of the New Outsourcing Guidelines requires that banks and financial institutions (each referred to herein as an institution), must ensure that outsourcing arrangements neither diminish an institution’s ability to fulfil its obligations to customers nor impede effective supervision by the BoT. In this regard, institutions are required to take steps and measures which will ensure that the service provider employs the same standard of care in performing the services as would have been employed by the institutions if the activities had not been outsourced.
We set out below key provisions to be considered by institutions when entering into outsourcing arrangements:
BoT Approval on Outsourcing Arrangement
Institutions are required to obtain the approval of the BoT for outsourcing their “non-strategic but material functions and activities”. Non-strategic but material functions include activities of such importance that any weakness or failure in the provision of such activities can have a significant effect on the institution’s ability to meet its regulatory responsibilities or to carry on its business. The New Outsourcing Guidelines provides a list of minimum criteria which BoT will consider when approving an outsourcing arrangement, including:
Assessment of Outsourcing Arrangements
Before an institution outsources its services, it is required to assess if a particular outsourcing arrangement involves material business activity of the institution. Under the New Outsourcing Guidelines, material outsourcing arrangements includes such arrangements which, if disrupted, may significantly impact the business operations, reputation, or profitability of an institution. This definition is similar to the one provided under the outsourcing guidelines in Kenya issued in 2013 (the Kenyan Outsourcing Guidelines).
In addition to the existing factors provided under the 2008 Outsourcing Guidelines which institutions must observe when assessing outsourcing arrangements, the New Outsourcing Guidelines have expanded these factors to include the following:
Under the Kenyan Outsourcing Guidelines, an activity is also considered material if it accounts for at least five percent (5%) of the institution’s revenues or costs. There is no such percentage in the Tanzanian Guidelines.
Services Restricted from Being Outsourced
Institutions are prohibited from outsourcing strategic functions and activities, as such functions are generally compatible with the managers’ obligation to run an institution under their own responsibility. The 2008 Outsourcing Guidelines provided a general statement on the activities and functions which should not be outsourced, and examples of such services were very broad. The New Outsourcing Guidelines specifies that, the following services should not be outsourced:
It is helpful that institutions can consult BoT in case of any uncertainty as to whether a business activity that is to be outsourced would be regarded as material or not for the purposes of the New Outsourcing Guidelines.
The New Outsourcing Guidelines further provide a list of activities which shall not be considered as outsourcing, including the following:
Institutions should note, that although the above services are not considered as outsourcing services requiring prior approval of the BoT, notifications on engagements with these arrangements are still required to be submitted to the BoT under other laws.
Information Required to be Included in an Outsourcing Agreement
Outsourcing contracts should include the following additional provisions as stipulated under the New Outsourcing Guidelines:
BoT Approval on Payment of Outsourcing Fees
In addition to the requirement to include details of fee structure and management of costs in the outsourcing contracts, institutions must obtain prior approval of the BoT before making actual payments to the service providers. This requirement was not included in the 2008 Outsourcing Guidelines and will be particularly relevant to service providers to the institutions.
Limitation on Exclusivity Clauses
Similar to the restrictions under the Fair Competition Commission Act, 2003, the New Outstanding Guidelines requires that outsourcing contracts should not have exclusivity clauses which will prevent an institution from obtaining similar services from other providers. This requirement was not included in the 2008 Outsourcing Guidelines.
Requirement to Evaluate Service Providers
Institutions are now required to carry out detailed due diligence of the service providers engaged in outsourcing arrangement including but not limited to:
Additionally, the New Outsourcing Guidelines require institutions to ensure that the service providers are properly trained to handle their responsibilities with care particularly on soliciting customers, hours of calling, privacy of customer’s information and conveying the correct terms and conditions of the products on offer.
Requirements on Business Continuity Management and Disaster Recovery Plan
The New Outsourcing Guidelines require institutions to ensure that their service providers:
Further, institutions have a duty to retain an appropriate level of control over their outsourced services and the right to intervene with appropriate measures to continue its business operations in such cases without incurring prohibitive expenses and without any break in the operations of an institution and its services to the customers, in order to mitigate the risk of unexpected termination of the outsourcing agreement or liquidation of the service provider.
In establishing a contingency plan, an institution must consider the availability of alternative service providers or the possibility of bringing the outsourced activity back in-house in an emergency and the costs, time and resources that would be involved and that is why care needs to be taken in drafting contracts with service providers.
Monitoring and Control of Outsourced Activities
In addition to the requirement on evaluation of service providers as mentioned above, under the New Outsourcing Guidelines, the institutions are required to monitor and control outsourced activities for purposes of ensuring that there is no deterioration or breach in performance standards, confidentiality, and security, and in business continuity preparedness which would affect the clients of an institution and have negative impacts on the institution in terms of reputation or financial risk.
Institutions are required to:
The New Outsourcing Guidelines have introduced provisions on transfer pricing, which were not included in the 2008 Outsourcing Guidelines. Essentially the New Outsourcing Guidelines require any institutions involved in cross-border transfer of services within a group of companies or with connected parties or transfer of services within the country, to comply with the transfer pricing methodologies which are consistent with the Transfer Pricing Regulations issued by Tanzania Revenue Authority (the TRA). In this regard, an institution that seeks to engage in intra-group outsourcing shall:
The compliance requirement above is similar to the requirements under the Tax Administration (Transfer Pricing), Regulations 2018 (the Transfer Pricing Regulations) and therefore in our view, Transfer Pricing Documentation prepared for the purpose of compliance with the Transfer Pricing Regulations can also be submitted to the BoT while seeking approval of the intra group outsourcing arrangements, and there should be no requirement to prepare any further documentation in this respect. Institutions should ensure that their transfer pricing documentation is regularly updated to reflect any changes in outsourcing arrangements.
The New Outsourcing Guidelines have given the BoT the mandate (in appropriate circumstances), to disallow an outsourcing arrangement, if it is of the opinion that the price of an intra-group outsourced service or goods is not at arms’ length or approve it to proceed only under the pricing terms that the BoT considers to be reasonably representative of market pricing. It is hoped that the BoT will consider transfer pricing principles in ascertaining whether the outsourced arrangements meet the arms’ length test.
It is important to note that in the event that an outsourcing arrangement is not approved by the BoT, an institution will not be in a position to incur the expenses or engage non-resident service providers and it may then have no option but to procure the services locally. Where the expenses have already been incurred without BoT approval, the non-resident service provider may be required to write off the recharged expenses in its books (and an institution would also need to reverse the expense), as an institution which has received the services cannot obtain BoT approval to pay for the services. The reversal of the expenses in the books of an institution could also trigger adverse tax implications, which would need to be considered on a case-by-case basis.
ALN Tanzania | A&K Tanzania
ALN Tanzania | A&K Tanzania
ALN Kenya | Anjarwalla & Khanna
Contributor: Samiath Mohamed, Associate