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How to Help Your Clients Mitigate Third-Party Risk

Even before COVID, your clients were likely becoming more reliant on third-party services for their critical business activities. Sure, these parties help to catalyze digital transformation. But they likely increased your clients’ risk profile, as well. How to help clients mitigate third-party risk? 

Third-party risk emerges as a critical threat

Indeed, firms across all major sectors are becoming increasingly reliant on third parties for the delivery of critical functions and services.

The benefits are obvious. Many of the services in question enable digital transformation, providing greater resilience to your client’s own technology infrastructure.

There’s been a cost, though. Many of these services create single points of failure.

That means the failure of critical third-party services has cascading effects on the availability of your client’s services.  

Regulators intervening to mitigate third-party risk

These dependencies have been noted by industry regulators, too. Clients in the financial space, specifically, are likely to face serious challenge by their supervisory authorities.

For instance, the Financial Policy Committee of the Bank of England summarized that “the increasing reliance on a small number of CSPs [cloud-based providers] and other CTPs [critical-third parties] for vital services could increase financial stability risks in the absence of greater direct regulatory oversight of the resilience of the services they provide.”

Financial regulators in the U.K. are, therefore, exploring ways to compel supervised entities to mitigate their third-party risk. Regulators of other critical infrastructure industries are likely to follow suit.

How, then, should your clients mitigate third-party risk to ensure (future) compliance as well as ongoing operational and organizational resilience?

Download Ensuring Organizational Resilience by Mitigating Critical Third-Party Risk

Best-practice measures to mitigate third-party risk

The big thing for your clients to internalize is the importance of maintaining a Board-approved policy relating to outsourcing arrangements involving their material (or critical) business activities.

What goes into such policy?

For starters, an effective policy should include sufficient monitoring processes, to manage the outsourcing of material business activities as well as legally binding agreements with third parties.

Even if not yet compelled to do so, your clients should also get into the habit of (1) consulting with regulators prior to entering into agreements to outsource material business activities and (2) notifying those supervisory bodies after entering into agreements to outsource material business activities.

Further best-practice measures to mitigate third-party risk 

That’s the bare minimum, though.

Your clients should also improve notification procedures, providing summaries of the key risks involved in the outsourcing arrangement and the risk mitigation strategies in place to address these risks.

Further best-practice measures clients can implement to mitigate their third-party risk include:

  • Identify, assess, manage, mitigate, and report on risks associated with outsourcing to meet existing obligations to stakeholders
  • Have procedures to ensure that all relevant business units are made aware of and have processes and controls for monitoring compliance with, the outsourcing policy.
  • Deputize a Board-level supervisory group to oversee the outsourcing of a material business activity.
    • Although outsourcing may result in the service provider having day-to-day managerial responsibility for the business activity, that group should be responsible for complying with all requirements that relate to the outsourced business activity and should have the responsibility to ensure that outsourcing risks and controls are taken into account as part of the firm’s overall risk management strategy

Clients, of course, shouldn’t dawdle in the face of likely regulatory pressure and very real resilience risk. Here, digital third-party risk management software can help get these risk-mitigation programs off the ground efficiently.

How so? Download our Guide to Ensuring Organizational Resilience by Mitigating Critical Third-Party Risk for more.

Download Ensuring Organizational Resilience by Mitigating Critical Third-Party Risk