Raphaels Bank (“Raphaels”) has received separate fines of £775,100 from the FCA and £1,112,152 from the PRA in respect of failures in the systems and controls supporting the oversight and governance of its outsourcing arrangements.
Raphaels is a retail bank providing banking and related financial services. Its Payment Services Division (PSD) operates prepaid card and charge card programmes in the UK and Europe. The PSD relies on outsourced service providers to perform certain functions that are critical to the operation of its card programmes. These functions include the authorisation and processing of card transactions, a service performed by third party card processors.
Raphaels failed to have adequate processes to enable it to understand and assess the business continuity and disaster recovery arrangements of its outsourced service providers – particularly how they would support the continued operation of its card programmes during a disruptive event. The absence of such processes posed a risk to Raphaels’ operational resilience and exposed its customers to a serious risk of harm. These risks crystallised on the 24 December 2015 when a technology incident occurred at a card processor.
The incident caused the complete failure of the authorisation and processing services it provided to Raphaels and lasted over eight hours. During this period, 3,367 customers were unable to use their prepaid cards and charge cards. In total, the card processor could not authorise 5,356 customer card transactions attempted at point of sale terminals, ATM machines and online. Seasonal workers, who depended on their cards to receive their wages, used the largest prepaid card programme affected by the incident. The timing of the incident, on Christmas Eve, is likely to have exacerbated the impact of the outage.
Raphaels’ specific failings in relation to the incident resulted from deeper flaws in its overall management and oversight of outsourcing risk from Board level down. The joint FCA and PRA investigation identified weaknesses throughout the bank’s outsourcing systems and controls which Raphaels ought to have known about since April 2014. These included a lack of adequate consideration of outsourcing within its Board and departmental risk appetites, the absence of processes for identifying critical outsourced services and flaws in its initial and on-going due diligence of outsourced service providers. Raphaels’ outsourcing arrangements continued to be inadequate until the end of 2016, by which time Raphaels had designed new outsourcing policies and procedures to remedy the failings.