Status: Draft -- Not PublishedWill be live at 08/25/2023 13:38
IIF Submits Response to FSB Consultation on Third-party Risk Management
On August 22nd, the Institute of International Finance (IIF) submitted a response to the Financial Stability Board’s (FSB) Consultative Document on “Enhancing Third-Party Risk Management and Oversight: A toolkit for financial institutions and financial authorities.”
This consultation builds on important work that the FSB has undertaken on regulatory and supervisory approaches to the management of outsourcing and third-party risk, including “Regulatory and Supervisory Issues Relating to Outsourcing and Third-Party Relationships: Discussion paper” (2020) and “Third-party Dependencies in cloud services: Considerations on financial stability implications” (2019). The IIF has previously submitted its views in detail on these topics, including in response to the FSB’s pre-consultation, “Questionnaire on Third-Party Risk Management and Outsourcing” in May 2022. The FSB’s work also has a direct link to the IIF’s work on cloud computing and financial innovation. In the IIF’s view, financial institutions’ migration to cloud service provision is a vital enabler of digital transformation and it promotes financial institutions’ operational resilience.
The IIF is supportive of the FSB’s long-standing leadership in promoting greater regulatory and supervisory harmonization, cooperation, and collaboration, which helps to reduce fragmentation in regulatory and supervisory approaches across jurisdictions and across the financial services sector. In the letter, we encourage the FSB to continue its efforts to minimize regulatory fragmentation and we offer some suggestions for how these efforts could be advanced in the context of third-party risk oversight. The letter also highlights some areas where the FSB could provide additional clarity on its approach, and we provide some further considerations regarding third-party risk management from the financial services industry perspective for the FSB’s consideration.
We also support the FSB’s overall approach to the toolkit as a flexible instrument that is not intended to be interpreted as binding requirements. The FSB should further consider the need to balance regulatory interoperability with the flexibility of a toolkit that can be adapted to different legal and regulatory frameworks. Further engagement among FSB members could be helpful in developing interoperable jurisdictional frameworks that reduce the negative impacts of market fragmentation, which makes the overall financial system more fragile and less resilient, efficient and secure. We also encourage the FSB to emphasize the concept of proportionality within the toolkit and in its discussions with FSB members. The final toolkit should recommend that FSB members conduct a careful balancing of costs and benefits and consider the negative impacts of detailed and prescriptive requirements on financial services innovation.
Finally, the IIF supports the emphasis of the toolkit on critical third-party services. Given the FSB mandate to promote global financial stability, the emphasis of the toolkit should remain on service providers that support a financial institution’s critical services. Services and service providers that are not critical generally have little or no potential to create financial stability concerns. That said, we are supportive of the consideration of non-critical service provider relationships where appropriate in relation to third-party registers and the management of concentration risks.