Common Group Interests. In some industries, such as banking, financial services and insurance (“BFSI”), common regulations impose a compliance burden on competitors. In such cases, competitors may elect to establish a jointly owned “group captive” to perform such compliance-mandated services. Such “group captives” enable industry players to share information on compliance standards to design a standard template of services that meet those standards.
A Model in Decline. Group captives were popular in the 1980’s and 1990’s before outsourcing service provider developed and perfected the classic outsourcing model. A review of group captives offers an insight into this evolution.
Shared Control. Group captives involve significant challenges in terms of formation, governance, control, management and competitiveness. For example, the industry leader might be concerned about contributing its own proprietary know-how in a venture that would benefit its competitors. Admission of new “partners” requires an internal governance procedure that may require vetting and analysis processes by each of the existing “partners,” increasing operating costs.
Exit. Exit costs may be high, since a partner that believes the venture no longer serves its purposes may have to choose between taking a “low” price or simply abandoning its investment.
Competition Law. Group captives also involve significant risk of violation competition rules under applicable antitrust or competition laws of the relevant jurisdictions for the enterprise customers. Where their services are in the nature of “pre-competitive” conduct, such as identifying and agreeing on industry standards but not actually performing any services for compliance with such standards, such competition law generally finds no material risk of anti-competitive behavior.
Morphology: Industry Standards Groups. As a result of these several challenges, group captives have not become significant service providers. However, group captives – in the form of trade associations and ad hoc consortia — continue to play an important role in the identification and updating of applicable industry standards and lobbying for relief from regulations.
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