Australia’s banking watchdog says outsourcing does not always lead to cost savings, rather it can lead to higher costs and a loss of expertise.

Australian Prudential Regulation Authority (APRA) chairman John Laker says APRA is not opposed to outsourcing.

However, authorised deposit-taking institutions (ADI) needed to recognise that while outsourcing may reduce costs, “it always reduces control” over resourcing, timelines and communication, Mr Laker said.

“While outsourcing can also reduce risks where functions are taken over by well-trained specialist providers, core expertise leaves the ADI, possibly never to return,” Mr Laker told a business lunch in Melbourne on Friday in prepared remarks.

“Poor control over outsourced service providers can actually lead to higher costs in the long run.”

Mr Laker said APRA did have concerns with how cost-cutting might be achieved.

“Risks arise when efficiencies are sought through reductions in critical support functions and underinvestment in risk management capabilities,” Mr Laker said.

“Cutbacks to risk management staffing because they seem an easy cost centre target, not because the ADI has reined in its risk appetite or exited certain activities, is a short-sighted approach that we would want to strongly challenge.”

Mr Laker said major outsourcing projects required the close involvement of the board to ensure that the trade-offs involved were well understood and the risks were being considered in a transparent manner.