Published July 27, 2021 • 3 minute read
We’ll break down the types of third-party risk you may face, and their potential consequences.
Types of Third-Party Risk for Lending & Financial Services
The Federal Deposit Insurance Corporation (FDIC) identifies seven risk categories associated with third-party relationships. Incidents relating to any of these could result in a breach of contract, and some could lead to liability claims. Regardless, tracking COIs for business is critical to ensuring the third party carries appropriate and valid coverage in case something goes wrong.
Strategic risk may arise when a financial institution uses a third party for a function that does not support strategic objectives. While this is more likely to be a failure of your organization rather than the third party, in some instances, it could be the result of a breach of contract.
Reputation risk is hard to quantify, but easy to recognize. The actions of subcontractors and vendors can reflect on your organization. For instance, if you outsource your IT to an outside company and it experiences a breach that compromises your customers’ information, it could reflect negatively on your organization.
Operational risk typically consists of failures with processes, systems, and employees. Any time you add more contractors or vendors, it increases the complexity of your operations, which can create new operational risk. On the flip side, relying too heavily on any one vendor or contractor also carries operational risk.
Transaction risk occurs when your subcontractor or vendor fails to perform as expected or provide the agreed-upon products. This can result from technology issues, human error, poor capacity, fraud, and lack of an appropriate contingency plan.
What happens if the vendor or subcontractor you work with goes out of business? If they’re not on firm financial footing, it’s a very real possibility. That’s why credit risk is so important for financial institutions to assess.
Not only does your business need to comply with all relevant laws pertaining to the financial services sector, but so might your subcontractors and vendors. If they fail to do so, your business may be in hot water, so regulatory screening is critical.
Depending on your relationship with your subcontractors and vendors, other risks may also arise. It is difficult to predict the full scope, however, which makes effective risk management all the more important.
Potential Consequences of Failing to Manage Third-Party Risk in the Financial Sector
- Financial Loss
- Regulatory Fines
- Reputational Damage
Why Rely on BCS to Improve Your Financial Institutions COI Tracking?
COI tracking is one of the most basic and crucial risk management techniques, and yet it is often overlooked. Businesses frequently entrust the process to employees with minimal time and experience, who use difficult-to-manage spreadsheets.
BCS takes the headaches out of the process. Our self-service solution gives you access to the BCS App, an easy-to-use platform that centralizes your information and enables you to check compliance status quickly and efficiently. The full-service solution also adds a team of expert compliance analysts to do much of the work for you, including reviewing and correcting documents.
Regardless of the level of service you choose, you can trust BCS will help improve the COI tracking of your financial institution, for an additional layer of protection against third-party risk.