Compliance requirements for third-party risk management

The financial sector operates within a complex and evolving regulatory landscape, with numerous requirements and guidelines governing third-party risk management. Financial institutions must navigate these regulations to ensure compliance, protect sensitive data, and maintain operational resilience. This article provides an overview of the key regulatory considerations for third-party risk management in the financial industry.

The increasing regulatory focus

Regulators worldwide are placing increased emphasis on third-party risk management due to the growing reliance of financial institutions on external vendors and the potential for supply chain attacks to cause widespread disruption. These regulations aim to ensure that financial institutions adequately assess, monitor, and control the risks associated with their third-party relationships.  

Key regulatory considerations

Financial institutions must consider a range of regulations when managing third-party risks, including:

• Data Protection Regulations:

  • GDPR (General Data Protection Regulation): The GDPR imposes strict requirements on the processing of personal data of individuals within the European Union (EU), including data processed by third-party vendors. Financial institutions must ensure that their vendors comply with GDPR requirements, such as data subject rights, data breach notification, and data transfer restrictions.   
  • CCPA (California Consumer Privacy Act): The CCPA grants California residents various rights regarding their personal information, including the right to know, the right to delete, and the right to opt-out of the sale of their data. Financial institutions must ensure that their vendors comply with CCPA requirements when handling the personal information of California residents.   

• Financial Industry Regulations:

  • DORA (Digital Operational Resilience Act): DORA aims to create a comprehensive framework for digital operational resilience across the financial sector in the EU. It imposes requirements on financial entities to manage ICT risk, including third-party risk, and to ensure they can withstand, respond to, and recover from severe disruptions.   
  • GLBA (Gramm-Leach-Bliley Act): In the United States, the GLBA requires financial institutions to protect the privacy and security of customer information. This includes ensuring that third-party vendors also safeguard customer data.
  • NYDFS Cybersecurity Regulation: The New York Department of Financial Services (NYDFS) Cybersecurity Regulation requires financial institutions operating in New York to establish and maintain a cybersecurity program, which includes third-party risk management requirements.
  • PCI DSS (Payment Card Industry Data Security Standard): PCI DSS applies to any organization that handles cardholder data. Financial institutions that outsource payment processing or other card-related functions must ensure that their vendors comply with PCI DSS requirements.

• Outsourcing Guidelines:

  • Many regulatory bodies have issued specific guidelines on outsourcing, which address the risks associated with relying on third-party vendors to perform critical business functions. These guidelines often emphasize the need for due diligence, contract management, and ongoing monitoring of vendor performance.

Compliance challenges

Financial institutions face several challenges in complying with third-party risk management regulations:

• Complexity of Regulations: The sheer number and complexity of regulations can make it difficult for financial institutions to understand and implement all applicable requirements.
• Lack of Standardization: The lack of standardization across different regulations can create inconsistencies and increase compliance costs.
• Data Governance: Ensuring proper data governance and data sharing practices with third-party vendors can be challenging, especially when dealing with cross-border data transfers.
• Continuous Monitoring: Continuously monitoring vendor compliance and adapting to evolving regulatory requirements requires significant resources and effort.

Strategies for achieving compliance

Financial institutions can employ several strategies to achieve compliance with third-party risk management regulations:

• Establish a Comprehensive Third-Party Risk Management Program: Develop a centralized program that integrates all aspects of third-party risk management, including risk assessment, due diligence, contract management, ongoing monitoring, and incident response.
• Conduct Thorough Due Diligence: Perform thorough due diligence on potential vendors to assess their compliance with relevant regulations and their ability to meet the institution’s security and privacy requirements.
• Implement Robust Contract Management: Include clear and comprehensive contractual clauses that address regulatory requirements, data protection, security standards, audit rights, and incident reporting obligations.
• Automate Compliance Processes: Leverage technology solutions to automate compliance processes, such as vendor risk assessments, data mapping, and ongoing monitoring.
• Stay Informed About Regulatory Changes: Continuously monitor and adapt to changes in regulations and guidelines to ensure ongoing compliance.
• Collaborate with Industry Peers: Share best practices and collaborate with other financial institutions and industry groups to stay informed about regulatory developments and effective compliance strategies.

The role of regtech

Regulatory technology (RegTech) solutions can play a crucial role in helping financial institutions automate and streamline their third-party risk management compliance efforts. RegTech tools can assist with vendor risk assessments, compliance monitoring, data mapping, and reporting, enabling financial institutions to improve efficiency and reduce compliance costs. 

Navigating the complex regulatory landscape of third-party risk management is essential for financial institutions. By understanding the key regulatory considerations, addressing compliance challenges, and implementing effective strategies, financial institutions can ensure compliance, mitigate risks, and maintain the trust of their customers and stakeholders.