FSB published a note summarizing the main issues raised and views expressed in responses to the discussion paper on regulatory and supervisory issues on outsourcing and third-party relationships. The discussion paper, which was open for comments from November 2020 to January 08, 2021, described the existing regulatory and supervisory approaches and outlined the common regulatory and supervisory challenges associated with outsourcing and third-party risk management. Nearly 39 responses were received from a wide range of stakeholders, including banks, insurers, asset managers, financial market infrastructures, third-party service providers, industry associations, public authorities, and individuals. Overall, respondents welcomed the discussion paper, agreed with the challenges and issues identified in the paper, and suggested measures to address these challenges.
Respondents agreed that concentration risks in the provision of certain critical services are very difficult to substitute and with the rights to access, audit, and obtain information from third parties. Additional potential challenges or issues that were highlighted as deserving attention are intra-group outsourcing; fragmentation of regulatory, supervisory, and industry practices across sectors and borders; restrictive data localization requirements; cyber and data security; and resource constraints at financial institutions. To address these challenges or issues, respondents suggested a range of measures that can be categorized into five areas:
- Development of global standards on outsourcing and third-party risk management. Many respondents expressed that global standards could strengthen resilience and ability of financial institutions to manage outsourcing and third-party risks. These standards could help to address regulatory and supervisory fragmentation; however, they should be proportionate to the complexity, size, nature, and risk profile of different financial institutions.
- Adoption of consistent definitions and terminology. A number of respondents asked FSB to clarify or improve certain existing definitions to enable clear understanding of what activities are in the scope of regulation while others suggested that FSB should establish globally consistent definitions and terminology (or a lexicon) related to outsourcing, cloud computing, and operational resilience.
- Use of pooled audits, certificates, and reports. Many respondents suggested that FSB should encourage the use of pooled audits as an effective form of third-party risk management that can help to reduce the burden on the relevant stakeholders; yet others suggested that supervisory authorities should encourage the use of certificates and reports provided by third-party service providers to evidence compliance with internationally recognized standards as a means of promoting a consistent approach to third-party oversight by financial institutions.
- Dependency mapping and enhanced supervisory oversight. Several public authority respondents suggested that financial institutions should establish an inventory of services and technologies provided by third-parties to map financial institutions’ dependency on third-parties. They also suggested that financial institutions should periodically evaluate the information they receive from third-party service providers, regularly update the skills and training of employees responsible for monitoring their third-party dependencies, and share their experiences with supervisory authorities.
- Enhanced cross-border cooperation and dialog with stakeholders. Many respondents suggested that FSB should organize a regular international forum (or a public-private global working group) comprising relevant stakeholders to exchange views and best practices, with a focus on cross-border issues associated with outsourcing and third-party relationships. Such forum could also confidentially discuss concerns and practical experiences on specific cross-border or cross-sectoral issues while leveraging the existing regulatory and supervisory arrangements.
Most respondents did not mention significant issues with regard to financial institutions’ outsourcing or third-party relationships during the COVID-19 crisis while others stated that the crisis had highlighted the benefits of outsourcing. A number of respondents also stated that the crisis evidenced the resilience of critical service providers (such as cloud service providers) and their cyber-security capabilities. However, a few public authority respondents observed that the categorization of critical services at some financial institutions may need to be revisited in light of the crisis. Some services that had been categorized as “not critical” were found to be material.
Keywords: International, Banking, Insurance, Securities, COVID-19, Third-Party Risk, Systemic Risk, Outsourcing Risk, Cloud Computing, Responses to Consultation, FSB
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