ASIC Sounds Alarm on Outsourcing Risks After Review Exposes Governance Gaps

Key Takeaways

• Governance Gaps Identified: ASIC’s review found inconsistent risk management practices among financial advice licensees and responsible entities using offshore service providers (OSPs).
• Accountability Remains with Licensees: Commissioner Alan Kirkland warned that AFS licensees cannot outsource their core obligations or compliance responsibilities.
• Cyber and Operational Risks Rising: ASIC flagged growing threats from cyber-attacks and foreign law conflicts that can disrupt outsourced operations.
• Regulatory Scrutiny Intensifying: ASIC plans to continue monitoring governance and risk management frameworks, with enforcement action on the table.
• Precedent of Cyber Failures: The warning follows prior enforcement actions against FIIG Securities, Fortnum Private Wealth, and the 2022 Federal Court ruling against RI Advice.

Deep Dive

Australia’s financial watchdog has issued a pointed warning to licensees relying on offshore service providers, urging stronger oversight and risk management after a review uncovered governance shortfalls that could leave consumers and investors exposed.

In findings recently published, the Australian Securities and Investments Commission (ASIC) said that while the use of offshore service providers (OSPs) has become increasingly common among financial advice licensees and responsible entities (REs) of managed investment schemes, many firms still lack basic frameworks to manage associated risks.

The review found that risk management standards varied widely, with some entities maintaining comprehensive controls and others effectively operating on trust. ASIC Commissioner Alan Kirkland cautioned that outsourcing key functions does not relieve licensees of accountability.

“Advice licensees and REs can outsource services, but they cannot outsource their fundamental obligations,” Kirkland said. “When licensees neglect their responsibilities, consumers, investors, and financial services businesses can be exposed to harm, such as exposure of personal information through cyber incidents.”

Kirkland said firms must retain the skills to identify material risks, evaluate service providers’ performance, and ensure they remain fit for purpose. He added that the more critical the outsourced function, the greater the potential consequences of inadequate oversight, especially when those services are handled offshore.

The commissioner warned that risks are mounting amid rising cyber threats and complex cross-border arrangements that can lead to operational disruptions or conflicts with foreign laws.

“Financial services firms cannot drop their guard,” he said. “Cyber-attacks are more prevalent and growing in sophistication. All licensees must proactively review governance frameworks and address issues that threaten to undermine public confidence in their business and, in turn, the financial system.”

ASIC said it will continue scrutinizing governance and risk frameworks and is prepared to take enforcement action against firms that fail to meet their obligations.

The warning follows recent enforcement moves against FIIG Securities and Fortnum Private Wealth for alleged lapses in managing cybersecurity risk. It also echoes the 2022 Federal Court decision against RI Advice, which found the firm in breach of its license obligations after failing to maintain adequate cybersecurity systems, a landmark case that cemented cyber resilience as a core compliance requirement for AFS licensees.

The latest findings underscore how weak oversight of outsourced functions can erode both operational integrity and consumer protection, a risk that looms larger as firms increasingly rely on offshore technology and service hubs.

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