The Federal Reserve issued guidance on Thursday warning banks about the risks of hiring service providers, reminding bank managers and directors that they are responsible for the activities of subcontractors.
“The guidance does not discourage financial institutions from outsourcing activities to service providers, but says firms should be aware of the potential risks,” the Fed said. “If service provider relationships are not managed effectively, they may expose financial institutions to risks that can result in reputational problems, financial loss, or regulatory actions…”
The guidance is part of an effort to encourage banks to address emerging risks, such as cyberattacks, that can increase with the hiring of contractors. Carolyn DuChene, the deputy comptroller for operational risk at the OCC, said earlier this year that banks are hiring more contractors but were not “keeping pace [with]…risk management,” according to The Wall Street Journal.
In its guidance, the Fed said banks must implement processes and monitor the performance of its third-party contractors, as well as maintain an “exit strategy” in the event the contractor cannot fulfill his or her duty.
The guidance said the use of consultants varies from institution to institution, and that banks that outsource less important responsibilities may not have to devote as many resources to monitoring the activities, The Wall Street Journal reports.