Concerns raised over outsourcing in the financial sector

10 November 2020

The Financial Stability Board (FSB) is seeking to understand risks arising from outsourcing and third-party relationships.

The FSB, an international oversight body, has launched a consultation on challenges around management of outsourcing and third-party risks in the finance sector.

A discussion paper identified concerns around the “changing landscape” and the ability to access and audit third-parties, lack of oversight, and systemic risks around dependency on a concentrated number of service providers. This is especially relevant as reliance on third-party technologies increases.

The FSB said: “Financial institutions have to ensure that their contractual agreements with third-parties grant to them, as well as to supervisory and resolution authorities, appropriate rights to access, audit and obtain information from third parties. 

“These rights can be challenging to negotiate and exercise, particularly in a multi-jurisdictional context.”

The paper said “systemic risk could arise” if a large number of financial institutions depended on a few dominant third-party providers for critical services. 

It said: “A major disruption, outage or failure at one of these third parties could create a single point of failure with potential adverse consequences for financial stability and/or the safety and soundness of multiple financial institutions.”

The FSB said there were concerns with how “the identification, mapping, monitoring and oversight of third-parties” within the financial sector is “consistently less developed”, with little or incomplete data.

“There is a growing awareness of the importance of identifying and mapping those third-parties whose disruption or failure could impact financial institutions or financial stability and improve their understanding of third-party interconnectedness in the financial system. This is in turn giving rise to a number of regulatory and supervisory initiatives,” it said.

Identifying risks from subcontractors in the outsourced supply chain is also a practical challenge for both financial institutions and supervisory authorities, especially as some cases found outsourcing involved up to 20 providers. 

There was limited ability for contracts to “bind or influence” a third party’s subcontractors and this “decreases the longer and more complex the supply chain becomes”, said the paper.

The consultation runs until 8 January 2021.

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