Red alert

Amid concerns about systemic risk arising from an ever-greater reliance on outsourcing, the Financial Stability Board (FSB) published a consultation paper that examines emerging regulatory challenges.

While financial institutions have relied on outsourcing arrangements for years, the paper noted that this reliance has accelerated notably in recent years, particularly in the face of the Covid-19 pandemic.

“The financial sector’s recent response to Covid-19 highlights the benefits as well as the challenges of managing the risks of financial institutions’ interactions with third parties,” the paper said.

In particular, it was noted that there’s a concern about systemic risk arising from “concentration in the provision of some outsourced and third-party services to financial institutions.”

As more financial firms rely on particular outside providers for critical services, the prospect of systemic risk increases.

“Where there is no appropriate mitigant in place, a major disruption, outage or failure at one of these third parties could create a single point of failure with potential adverse consequences for financial stability and/or the safety and soundness of multiple financial institutions,” the paper said.

This risk is further complicated by the cross-border nature of these arrangements, the paper noted.

Given that concern, the paper highlighted the importance of ensuring that supervisory authorities have access to information from outside third parties.

“These rights can be challenging to negotiate and exercise, particularly in a multi-jurisdictional context,” the paper said.

Additionally, the paper noted that managing sub-contractors and supply chains is another challenge that has been highlighted by the sector’s pandemic response.

The deadline for feedback on the paper is Jan. 8, 2021. The FSB said that responses will help guide a discussion on regulatory approaches to outsourcing risks.