The Financial Stability Board (FSB) has disclosed the publication of its "toolkit for financial authorities and financial institutions for their third-party risk management and oversight." This toolkit, a product of months-long consultations with members of the financial sector, aims to address the growing dependency on third-party providers within the industry.
The final report on the toolkit suggests that this increasing reliance is largely driven by the digitalization of the financial services sector. However, it also highlights potential risks. "The developments in recent years have both brought benefits and introduced different types of risks to financial institutions. If such risks are not appropriately managed, these relationships could lead to risks to financial stability," says the report.
In a press release from FSB, it was explained that while the toolkit was developed in response to concerns over outsourcing-related risks, its primary focus is on critical third-party services. The objectives include aiding financial institutions in managing third-party risks and assisting financial authorities in monitoring and strengthening the resilience of the financial system. Simultaneously, it aims to establish a degree of uniformity in regulatory and supervisory approaches towards third-party risk management.
The press release further elaborates that the toolkit includes a list of common terms and definitions intended to promote clarity and consistency across various financial institutions. It also offers tools for identifying critical services and managing associated risks throughout a third-party service contract's duration. Additionally, it provides mechanisms for overseeing how these institutions manage third-party risks and control potential systemic threats.
According to another statement from FSB, its Standing Committee on Supervisory and Regulatory Cooperation greenlit the development of this toolkit for financial authorities back in 2021. Public consultations were conducted last summer regarding this proposed toolkit. FSB received 26 responses from trade associations, regulated financial institutions, other financial institutions, and third-party service providers during this consultation period. To gather more feedback, FSB organized a workshop in July.