MAS Sets Out Good Practices on Third-Party Risk Management

The information paper sets out the supervisory expectations, good practices, improvement areas, and case examples observed from the thematic inspections on third-party and operational risk management governance and control framework. MAS observed that the banks have generally established frameworks and processes to provide oversight of operational risk, but implementation effectiveness could be improved. There should be better articulation of key operational risk issues and trends, at both the bank-wide and key business unit levels, to identify emerging risks and determine if additional controls were necessary. With regard to the third-party risk management, MAS observed that banks generally have more established frameworks and processes to manage outsourcing arrangements compared to non-outsourcing arrangements; however, some banks fell short of expectations in management oversight and risk reporting of outsourcing activities as well as on due diligence and ongoing monitoring processes. MAS notes that banks that were still in the early stage of setting up a third-party governance structure largely managed their non-outsourcing arrangements in a decentralized manner through the respective business units, instead of subjecting them to the consolidated oversight of a management committee.

The good practices, as mentioned in the paper, on third-party risk management include cultivating staff competencies in operational risk management, raising risk awareness through the rollout of comprehensive accreditation programs, leveraging technology by implementing bank-wide systems and tools, focusing on emerging risks, including third party and cyber risks, and managing operational risk through a wider lens of non-financial risks such as the reputational and conduct risks. All banks are expected to benchmark their practices against this paper and take steps to address gaps, if any, in a risk-appropriate manner. The design of their controls would consider their specific organizational structures, business models, scale of operations, and risk profiles. The inspected banks have taken, or are taking, remedial actions to improve their frameworks and processes. The good practices highlighted should be referenced by all financial institutions given that they are exposed to similar risks. Non-bank financial institutions are encouraged to adopt the recommended practices where relevant and appropriate to the materiality of the risks posed by their third-party arrangements.

Keywords: Asia Pacific, Singapore, Banking, Operational Risk, Third Party Risk, Regtech, Cyber Risk, Outsourcing Risk, MAS