How to Manage Third Party Risks in a Changing Regulatory Environment?

Third parties, such as vendors and partners, play a crucial role in the growth and productivity of a digitized world. With the markets still suffering from the pandemic and the after-effects of the Russia-Ukraine war, the global financial scenario has become unsteady. Organizations struggle to understand which factors in their finances remain robust and cause shortfalls.

Similarly, they also try to figure out the weak links in third parties and ways to strengthen them. Regulators continue tightening their supervision of financial institutions and interacting with third parties with severe penalties for non-compliance. All these factors make third-party risk management not only a question of mitigating liability but one of ensuring business sustainability.

What are Third Party Risks and Their Importance?

In a less connected and more analog world, the third-party risk meant a matter of procurement. Purchase departments would identify potential cost savings related to outsourcing services, setting contracts, and engaging with the vendor. They look for a different vendor if the relationship with the current one becomes unreliable.

However, in financial terms, the third-party risk is a science and a critical part of overall enterprise risk management.

Cyber-attacks, security breaches, regulatory fines, legal actions, and fallout from third-party vulnerabilities have made headlines when we consider third-party risk. These factors have made third-party risk mitigation a top priority for managers, boards, and audit committees.

The reason third-party risk management has become essential is that the stakes are high and constitute the bulk of the business model. So, what happens when a product or service does not perform according to expectations or service level agreement? Will the third party fail to adhere to regulatory and legal requirements and get penalized?

This all boils down to the fact that mistakes with third parties can be catastrophic. Enterprises must ensure the quality of Third-Party Risk Management to get better results from partners.

Challenges by Changing Regulatory Environment

The reality of the financial industry is that there is a chance of reshaping due to innovations and technological advancements. Although evolution brings many benefits, it presents its set of challenges that firms need to face.

Daily Changes: When we talk about regulations, the rate at which the change happens is increasingly fast. Financial institutions need to grasp multiple changes every year.

Global Context: A significant challenge of change in the regulatory environment is that the regulations of one country may affect compliance in another. The financial world is a global market that requires consistency, and this uniformity is not only for a single company but spread internationally across many businesses.

Availability of Enormous Data: Financial institutions have a massive amount of data and information for storage and analysis. The management of this data falls into the hands of already overworked departments without an automated system implemented.

Cyber Threats: The rise of FinTech has inspired the financial industry to adopt a more digital and cloud-based approach to automation. Although it optimizes efficiency and productivity, it introduces a new set of challenges that needs constant monitoring and management.

Many financial institutions think that the rate at which regulatory changes happen has become too fast and frequent for traditional departments to handle.

Best Practices to Manage Third Party Risks

Financial institutions can improve third-party risk management and meet regulatory compliance by following a few best practices. These include:

Details of Third Parties: Risk assessment is the first step toward successfully managing third-party risks. Companies need to collate a list of third parties engaging with them. Enterprise-wise surveys combined with a framework of third-party risk management can give better insights and details of partners.

Checklist of Customer Risks: The effectiveness of a third-party risk management process is not possible until the firm understands the risks posed by third-party partners. Using a risk register in a management system that complies with CFPB can improve third-party management capability and sustainability.

Risk Segregation: Financial firms can categorize their partner relationships according to the level of risk posed by their customers after implementing a third-party risk management framework. Categorization of the high, medium, and low risks proves significant for them.

Some other valuable practices while using software for third party risk management include:

• Gaining a vital insight into building a simple repository
• Understanding the relevance of due diligence
• Determining the impact of changing regulations across the organization
• Analyzing the role of risk-based segmentation
• Scrutinizing third parties to ensure compliance according to governing body regulations

Proactivity Equals Effectiveness

Remaining proactive is not new to the financial industry, yet it comes in many phases through the third-party risk management process. The risk management process can sometimes fall between security and governance and may also suffer from a lack of visibility in cybersecurity, operational or financial perspectives.

Implementing sophisticated third party risk management software such as Predict360 identifies the network, technological and geographical risks associated with third-party partners. It offers an accurate insight and solid understanding of the risks and ways to protect the entire organization’s ecosystem (customers, partners, and vendors). Data is key to effective third-party risk management, and Predict360 interprets that data into valuable insights.