Hello everyone and thank you for joining me today for our Third Party Thursday podcast. I’m Ashley Roberts, Relationship Manager and Paralegal here at Venminder. Today’s topic is on how to complete a vendor risk assessment. I understand this can be a very daunting task, so I hope today’s podcast can shed some light on the process.
Take into consideration the regulatory guidance such as OCC Bulletins 2013-29 and 2017-7 as well as FDIC Letter 44-2008 to help guide you and map out the overall vendor risk assessment process.
Let’s go through several steps now:
- Very carefully comping an initial vendor inventory. Reach out to the Accounts Payable department and request an updated vendor list. You may want to insert a spend or frequency threshold to weed out obvious one time or small expenses. Compare this list to what you have on file to confirm no vendor relationship is being forgotten, as well as your third party risk program scope.
- Determine the business impact and regulatory risk. Determine the vendor’s business impact risk, to figure out if they are critical or non-critical to the organization, and regulatory risk, to figure out whether they are low, moderate or high risk to the organization. Each vendor relationship should have both a business impact level and regulatory risk rating.
You can determine the vendor’s regulatory risk impact by evaluating categories of risk such as operational, transactional, reputation and strategic just to name a few.
You can determine if the vendor is critical or not by asking yourself 3 simple questions:
- Would a sudden loss of this vendor cause a material disruption to our institution?
- Would that disruption impact our customers?
- Would the time to recover normal operations be greater than one business day (or 24 hours)?
If the answer to ANY of these is "YES", this vendor is critical from a business impact risk perspective. That should lead you to develop sound exit strategies as well as to require a deeper dive on their business continuity planning from a due diligence standpoint.
- Understand the inherent and residual risk. Once you’ve determined the business impact and regulatory risk, it’s important to understand the inherent risk. The inherent risk is the risk that is present when you first review the company. It’s the risk you find before any risk has been addressed, or mitigated.
For example, maybe the vendor has many consumer complaints which is impacting their reputation risk, then the next step is to mitigate these risks, which may include steps such as contractually requiring them to report all complaints to you, or reviewing their complaint management program or require root cause analyses of all complaints, just as a few simple steps. Then, you’ll have your residual risk, or the risk level after you’ve taken necessary precautions and appropriate measures to mitigate and reduce the inherent risk. Residual risk can never be higher than the inherent risk.
- Determine the ongoing oversight activity based on the vendor’s risk and criticality and report the results back to senior management and the board to keep them informed.
It’s important to not only follow the vendor risk assessment process during the initial selection phase but also as an ongoing due diligence effort as the risk can change at any time.
I hope you found this podcast helpful. Again, I’m Ashley Roberts, Relationship Manager and Paralegal at Venminder. If you haven’t already done so, please subscribe to our Third Party Thursday series.