The risk to a bank of doing business with a third party is real; the consequences of a risk event are not only disruptive, but often result in long-term reputational damage that can seriously affect the bottom lines of both the bank and the third party. We have all seen the media coverage. Parties who can make TPRM easier for banks by being proactive, transparent, and helpful will distinguish themselves in an ever more competitive environment.
They must show that they are compliant with the bank’s risk management requirements throughout the RFP, due diligence, onboarding processes, and lifecycle of the engagement. OCC1 TPRM regulations alone require the bank to evaluate 16 risk dimensions when engaging with a third party. And, if the relationship involves a high or critical risk activity, the bank will carry out a much more thorough due diligence; often including an on-site visit to inspect operational risk procedures in the case of a risk event.
Furthermore, there is now an expectation that the third party will willingly take a portion of the liability of such an event.
Banks are introducing a new level of discipline and quantification around the measurement of third part risk. With this knowledge, banks can determine third party indemnification provisions and allocation of liabilities at the contract stage. You will be at a disadvantage if you do not have a way to measure and verify the scope of a potential risk event that involves your products or services.
Celent is also beginning to witness the inclusion of provisions within contracts that require a third party to reimburse the bank for out-of-pocket costs relating to data security breaches that occurred due to the third party's negligence. As banks continue to push back on third party risk liabilities, third parties need to ensure they have in place insurance policies that can fund indemnification obligations.
My recent two research reports discuss the changing and expanding landscape for TPRM and explain why banks, regulators and third parties need to commit to their significant other in the management and responsibility of risk.
1Office of the Comptroller of the Currency 2013-29 Bulletin