Fed warning about banks' outsourcing has dire implications for recruitment consultants

The US Federal Reserve (the Fed) has warned its member banks about using contractors, a caution that could have wide-reaching implications for financial institutions, temporary financial workers, and even recruitment consultants.

In a guidance published last week, the Fed issued a guidance saying it was "reminding financial institutions it supervises to exercise appropriate risk management and oversight when using service providers".

The Fed oversees more than 3,000 national and state banks as well as all the major global banks that have registered offices in the US. A full list of its member banks can be found here but some of those affected include Australia's ANZ, Santander, Bank of America, Barclays, Citigroup, Commerzbank, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Lloyds; RBS and many others. RBS and Barclays, for instance, use large pools of contractors to keep overheads down, and most of the large banks deploy external consultants or contracted-in consultants for their recruitment requirements.

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The Fed caution stated that service providers posed potential risks, and if the relationships were not managed properly, they "could expose financial institutions to risks that can result in reputational problems, financial loss, or regulatory actions, according to the guidance."

This latest missive has far-reaching implications for finance workers who prefer to be temporary contract workers, for financial institutions who allocate jobs to consultants and contractors, and for financial services recruiters who place candidates.

As Allira Salem, national account manager at Kelly Services in Australia, pointed out, financial services institutions enjoyed the flexibility of contractors, particularly around the implementation of new projects, technology and regulatory changes, or during peaks in demand such as at the end of the financial year.

Garrett Tardew, manager in the banking and finance contract division of Robert Walters in Hong Kong said banks' temp populations - currently about 16% of the work force in the city state - would continue to grow as these guidelines were not enforced.

"In recent years checks on contract workers have become extremely stringent. The banks are taking every precaution possible against a bad hire. Also, if you look back over the past 10 years there have been many permanent employees who caused the banks reputational damage, heavy trading losses, and compliance problems but I’ve never heard of a contractor being at fault."

Although Tardew said that banks have tended to restrict the areas where contract workers are deployed to those where they post the least risk, "...almost all areas of banking are now using contractors with the obvious exception of the front office – however we have even started seeing some equity/ fixed income research areas starting to use contractors. The biggest areas for us currently are project management, product control, compliance and back or middle office support."

Although the Fed guidance said management of banks and other financial institutions were ultimately responsible for what contractors did, recruitment consultants said that increasingly employers were trying pass off all liability onto them if something went wrong with an employee.

One Singapore-based recruitment consultant who asked not to be named said that this would not only affect people who wanted to work on a contract basis, but any recruitment companies that placed contractors with companies.

A number of banks in Singapore had become a lot stricter in the past 12 months, and had tightened their terms and conditions when dealing with recruitment firms, he said.

Furthermore, banks were increasingly seeking indemnity from hires-gone-bad by putting all the liability on the recruitment firms. The consultant had seen two different agreements in recent months making recruiters wholly responsible should something go wrong with an employee they placed.

"These changes are already causing huge problems for recruiters," he said, who were already suffering declining business volumes in recent years as more and more employers went the direct recruitment route.

In addition, making the recruitment firms entirely responsible would push already-steep liability insurance premiums to unaffordable levels. "And it could mean having to do even more stringent background checks, which will add to our costs." 

Despite the possible implications, Kelly Services' Salem didn't believe the Fed guidance would have any effect on the use of contractors, who in Australia comprised about 10% to 15% of the financial services workforce. "However, with certain roles we may see stricter police, background and credit checks."  

Craig Brewer, director of Hudson in Singapore, said he was not surprised  by the Fed’s latest warning about contractors. “The Federal Reserve has been looking a lot deeper at this issue since the global financial crisis.”

He said it would make employers and recruitment firms think very carefully about candidates placed in organisations.