Financial Institutions Facing Third-Party Risk-Related Regulatory Enforcement Actions

In June 2023, the Interagency Guidance on Third-Party Relationships: Risk Management was officially released. The Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve (the Fed) collectively set the standards for how financial institutions should identify, assess, mitigate, and manage third-party risks. The guidance is comprehensive, yet it wasn’t immediately clear which activities should be prioritized.

A year later, we now have a better understanding of where regulators are focusing their attention. Recent consent orders revealed that fintech partnerships and banking as a service (BaaS) are under high scrutiny because of poor oversight practices. In 2023, 13.5% of severe enforcement actions were given to banks that partner with fintechs and BaaS vendors. 

Let’s take a look at some of the highlights from these enforcement actions and tips to ensure your financial institution maintains compliance with regulatory expectations. 

Third-Party Compliance Highlights from Regulatory Enforcement Actions

Over the past year, financial regulators have issued a range of enforcement actions related to third-party risk management (TPRM). Consent orders, cease and desist orders, and written agreements were delivered to various financial institutions engaged in BaaS relationships with third-party vendors. 
Regulators expect financial institutions to maintain safe and sound third-party relationships from the beginning to the end.

The enforcement actions required financial institutions to make improvements in their TPRM practices, which included:

• Formalized onboarding processes – Some financial institutions were required to develop a written onboarding process that includes details related to risk assessments, due diligence, and vendor selection and approval. These details should be outlined in a formal policy that’s approved and implemented by the board.  
• Effective compliance monitoring – Regulators highlighted certain oversight activities, such as ongoing monitoring of a fintech or BaaS vendor’s compliance and performance. A third party should be evaluated not just at the beginning of the relationship, but throughout its entire lifecycle. Monitoring activities should also include processes for addressing any fintech or BaaS activities that are found to be noncompliant. 
• Orderly contract termination – Terminating a fintech or BaaS partner relationship involves various types and levels of risk, especially when organizations fail to consider details like safe data destruction or return. Contingency plans must be developed to ensure financial institutions can safely terminate the fintech or BaaS partnership. 

4 Tips for a Compliant Third-Party Risk Management Program

The possibility of an enforcement action can be stressful, but maintaining compliance in your third-party risk management program often comes down to following industry best practices and the practices regulators have outlined in the Interagency Guidance. 

Here are some tips to consider that can help keep your program compliant: 

1. Review governance documents. Review your third-party risk management policy, program document, and procedures to ensure they address regulatory requirements, such as risk assessments, criticality classification, pre-contract due diligence, ongoing oversight activities, and exit strategies. Ensure your policy reflects your actual risk management processes, avoiding those that are aspirational or describe your future state.
2. Develop third-party risk management performance metrics. An effective way to evaluate your program’s compliance is through third-party risk management metrics. These can help reveal whether certain processes or activities are effectively managing third-party risk. 
   
   Example: Let’s say you want to focus on compliance with onboarding requirements. One metric you can look at is the percentage of critical or high-risk vendors that have been assessed according to the guidelines from the Interagency Guidance.
   
   
3. Consider tools and resources. Many third-party risk management programs are underfunded and understaffed, which can make it difficult to manage risk effectively. Smaller third-party risk management teams may be overwhelmed with too many administrative tasks, such as document collection, taking valuable time away from other activities that require more expertise. It may be worthwhile to invest in external tools and resources that are designed to help keep third-party risk management programs effective and compliant with regulations. 
4. Stay updated on regulatory actions. Consider reviewing recent consent orders to understand the specific deficiencies that were identified by regulators. These can serve as helpful reminders to look at your own third-party risk management program with more scrutiny and make improvements, if needed. 

Regulators continue to acknowledge the increasing dependence on third-party relationships, while also stressing the importance of practicing risk management activities. Although recent enforcement actions have focused on fintechs and BaaS, financial institutions should ensure all third-party relationships are appropriately managed and in compliance with regulatory requirements.