PRA Finalizes Policy on Outsourcing and Third-Party Risk Management
PRA published the policy statement PS7/21 that sets out the final supervisory statement SS2/21 on outsourcing and third-party risk management. Firms will be expected to comply with the expectations in SS2/21 by March 31, 2022. PS7/21 also contains feedback to responses to the consultation paper CP30/19, which was published in December 2019 and had set out proposals to modernize the regulatory framework on outsourcing and third-party risk management. PRA revised the policy in SS2/21 based on responses received to CP30/19; the revisions relate to the text on definition of outsourcing, proportionality, governance and record-keeping, pre-outsourcing phase, outsourcing agreements, data security, and business continuity and exit plans.
SS2/21 elaborates on the definition of outsourcing in the PRA Rulebook. It notes that there are arrangements between firms and third parties that fall outside this definition and are, consequently, outside the scope of the existing requirements on outsourcing and some of the detailed expectations in SS2/21. However, these third-party arrangements are still subject to the PRA Fundamental Rules and other PRA requirements and expectations on business continuity, governance, operational resilience, and risk management. SS2/21 clarifies the application of the principle of proportionality to intragroup outsourcing and to "non-significant firms." SS2/21 further sets out the expectations on governance, including under the Senior Managers and Certification Regime (SM&CR), and record keeping. SS2/21 also sets out expectations for firms during the pre-outsourcing phase and aims to:
- Complement the requirements and expectations on operational resilience, as set out in the PRA Rulebook, SS1/21, and statement of policy on operational resilience
- Facilitate greater resilience and adoption of the cloud and other new technologies, as set out in the response of BoE to the "Future of Finance" report
- Implement the EBA guidelines on outsourcing arrangements and clarify how PRA expects banks to approach the EBA Outsourcing Guidelines in the context of its requirements and expectations
- Implement the relevant sections of the EBA guidelines on information and communication technology and security risk management
Outsourcing arrangements entered into on or after March 31, 2021 should meet the expectations in SS2/21 by March 31, 2022. Firms should seek to review and update legacy outsourcing agreements entered into before March 31, 2021 at the first appropriate contractual renewal or revision point to meet the expectations in SS2/21 as soon as possible on or after March 31, 2022. SS7/21 is relevant to banks, building societies, and PRA-designated investment firms, insurance and reinsurance firms, groups in scope of Solvency II, including the Society of Lloyd’s and managing agents, and branches of overseas banks and insurers. Some content in SS2/21 is also relevant to credit unions and non-directive firms. The policy set out in PS7/21 has been designed in the context of the UK having left EU and the transition period having come to an end. Unless otherwise stated, any references to EU or EU-derived legislation refer to the version of the legislation that forms part of the retained EU law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework.
Related Links
Effective Date: March 31, 2022
Keywords: Europe, UK, Banking, Insurance, Proportionality, Operational Resilience, Third-Party Arrangements, Operational Risk, Outsourcing Risk, PRA
Previous Article
HMT Issues Proposal to Mandate Climate-Related Financial DisclosuresRelated Articles
PRA Finalizes Supervisory Approach for Non-Systemic Banks in UK
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.
EBA Finalizes Standards on Methods of Prudential Consolidation
EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).
EBA Updates List of Other Systemically Important Institutions in EU
EBA updated the list of other systemically important institutions (O-SIIs) in EU.
BCBS Report Concludes Basel Risk Categories Can Capture Climate Risks
BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.
UK Authorities Welcome FSB Review of their Remuneration Regime
UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.
PRA and FCA Letter on Addressing Risks from Use of Deposit Aggregators
PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.
MFSA to Amend Banking Act and Rules in Coming Months to Transpose CRD5
MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.
EC Delegated Regulation on Specialized Lending Exposures Under CRR
EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.
OSFI Proposes to Enhance Assurance Expectations for Basel Returns
OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.
ECB Issues Results of Benchmarking Analysis of Recovery Plans of Banks
ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.