The OCC issued updated and comprehensive guidance (OCC Bulletin 2013-29, the “Guidance”) to national banks and federal savings associations (collectively, “Banks”) concerning assessment and management of risks associated with third-party relationships. The OCC defines a third-party relationship as “any business arrangement between a bank and another entity, by contract or otherwise.” Comptroller of the Currency Thomas J. Curry stated that the OCC will give enhanced scrutiny to Banks’ third-party relationships because the OCC has increased concerns “regarding the quality of risk management on the growing volume, diversity, and complexity of banks’ third-party relationships, both foreign and domestic.”
Risk Management During Key Stages of Relationship Life Cycle
In the Guidance, the OCC states that a Bank’s failure to have an effective risk management process that is “commensurate with the level of risk, complexity of third-party relationships, and organizational structure of the Bank may be an unsafe and unsound banking practice.” Specifically, the OCC’s supervisory expectation is that a Bank will (throughout the life cycle of each third-party relationship) manage its third-party relationship risks by taking the following actions:
“Developing a plan that outlines the Bank’s strategy, identifies the inherent risks of the activity, and details how the Bank will select, assess, and oversee the third party;
Performing proper due diligence to identify risks and select a third-party provider;
Negotiating written contracts that clearly outline the rights and responsibilities of all parties;
Conducting ongoing monitoring of the third party’s activities and performance;
Executing a plan to terminate the relationship in a manner that allows the Bank to transition the activities to another third party, bring the activities in-house, or discontinue the activities;
Assigning clear roles and responsibilities for overseeing and managing third-party relationships and the risk management process;
Maintaining proper documentation and reporting to facilitate oversight, accountability, monitoring, and risk management; and
Conducting independent reviews of the risk management process to enable management to assess that the Bank’s process aligns with its strategy and effectively manages risks from third-party relationships.”
In addition to the recommended actions enumerated in the bullet point statements above, the OCC in the Guidance suggests various best practices for risk management of third-party relationships.
Risk Management Throughout Risk Management Life Cycle
The Guidance also stresses that throughout the life cycle of a third-party relationship a Bank, as part of its risk management process, should:
provide for effective oversight and accountability by assigning clear and distinguishable roles for the Bank’s: (1) Board of Directors; (2) senior management; and (3) employees who directly manage third-party relationships.
(1) retain documentation of its third-party risk management process; (2) obtain and keep reports on risk management and on the performance of third-party service providers; and (3) document the Board’s receipt of regular reports concerning ongoing monitoring and independent reviews.
conduct periodic independent reviews, by the Bank’s internal auditor or an independent third party, of the risk management process.
The Guidance provides two appendices, both of which contain useful information. Appendix A summarizes the operational risks, compliance risks, reputational risks, strategic risks and credit risks associated with use by Banks of third-party service providers. While the Guidance replaces and supersedes certain OCC guidance issued in 2000 and 2001, the Guidance supplements and is intended by the OCC to be read in conjunction with a substantial body of OCC releases and letters concerning third-party relationship management that are identified and briefly described in Appendix B in an extensive chart.
Board Retains Responsibility Despite Entering Into Third Party Relationship
In the Guidance, the OCC stresses that a Bank’s Board of Directors and senior management must monitor third-party relationships and that use of a third-party provider does not diminish the responsibility of the Board and senior management to see that the Bank’s activities conform to safe and sound banking practices and comply with applicable law.
Although the Guidance was issued by the OCC rather than by all of the federal banking agencies, the principles and guidelines expressed in the Guidance and the enhanced level of supervisory expectations of the OCC are likely to reflect, generally, the current views of the FRB and the FDIC on vendor management issues. Accordingly, it would be prudent for all FDIC-insured depository institutions to review their current relationships with third-party service providers to confirm that the related risks are being managed appropriately and effectively.
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