FSB highlights risks arising from bank outsourcing and third party relationships

The standard-setting body has released a discussion paper for public consultation which has identified a number of issues and challenges arising from the growing reliance of financial institutions on third party relationships, which have been accelerating during the global Coronavirus pandemic.

Contractural agreements and management of sub-contractors and supply chains are a particular source of concern, exposing the difficulties in negotiating audit and inspection rights in a multi-jurisdictional context.

The concentration of risk arising from reliance on a small number of key technology partners is another bugbear. It will be interesting to asecertain whether the FSB will begin to look at third party market making and platform outsourcing, such as that provided by MetaQuotes, the MetaTrader platform being a full solution which even causes client bases to be hosted on the third party system, rendering brokers with no intellectual property of their own and no control over their trading environment.

“These risks may become higher as the number of financial institutions receiving critical services from a given third party increases,” states the FSB. “Where there is no appropriate mitigant in place, 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.”

Given the cross-border nature of this dependency, the FSB believes that supervisory authorities and third parties could benefit from enhanced dialogue on this issue. The FSB is seeking comments on the discussion paper by 8 January, with the aim of refining current regulatory and supervisory approaches across global markets.