European regulations governing the management of third-party risks for financial institutions are becoming increasingly strict, in particular to strengthen the resilience of institutions and protect sensitive data in a context of growing outsourcing, particularly to the cloud.

The main regulations to be taken into account by banks are the EBA Guidelines on outsourcing and DORA (Digital Operational Resilience Act).

To comply with these regulations, banks and other financial institutions must establish a series of concrete measures to identify, monitor and mitigate the risks associated with their third-party service providers.

1. Governance and risk framework

 

Outsourcing policy and governance: Institutions should adopt a formal outsourcing risk management policy as part of the overall risk management framework. This policy should include procedures for selecting, evaluating and managing service providers, with management involvement in overseeing third-party risks.

Responsibilities: Management is responsible for overseeing risks and should clearly define roles and responsibilities in the management of service providers. Governance must ensure that the criteria for selecting and monitoring third parties are in place and applied.

2. Identification and classification of critical third-party service providers

 

Inventory of third-party providers: Establish a register of all outsourced services, identifying critical or important functions, with regular assessment of the risks and potential impact of each provider on the institution’s essential activities.

Classification of critical third parties: Providers should be classified according to their criticality (e.g. critical cloud or digital providers), in order to prioritise monitoring and risk management efforts.

3. Due diligence and evaluation of service providers

 

Due diligence: Before concluding a contract, a thorough analysis of service providers must be carried out, taking into account their financial stability, information security, subcontractor management and business continuity practices.

Selection criteria: Institutions must evaluate service providers according to specific criteria, particularly for providers of critical services, by analysing their technical capabilities, security and regulatory compliance.

4. Contracts and key clauses

 

Minimum contractual clauses: Contracts should include clauses setting out audit rights, security requirements, confidentiality and data protection obligations, subcontractor management, termination procedures and responsibilities in the event of security incidents.

Data protection and security: Data protection (in compliance with the RGPD) and IT security requirements must be included in contracts to ensure that service providers comply with current standards.

5. Ongoing monitoring and risk management

 

Monitoring third party performance: Institutions should put in place controls and performance indicators to continuously assess third party providers, particularly critical ones. This includes regular audits to verify compliance and performance.

Evaluation of subcontractors: Where subcontractors are used by providers, it is essential to ensure that all subcontractors meet the same standards, particularly in terms of security and resilience, to minimise risks to the supply chain.

6. Resilience and continuity testing

 

Digital resilience testing: Institutions should carry out regular resilience testing of critical systems, including those managed by third party providers. This includes crisis exercises, simulations of cyber attacks and business continuity tests to assess the effectiveness of recovery processes.

Business continuity and exit plans: Business continuity plans must be put in place for each outsourced critical service, including failure scenarios and rollback options. Exit strategies must also be developed to enable an orderly transition in the event of contract termination.

7. Incident reporting and communication obligations

 

Reporting of major incidents: If significant incidents occur (e.g. security breach or service interruption), financial institutions must notify the regulators within the prescribed deadlines. This includes any incident that has an impact on critical third-party services or digital infrastructures.

Documentation and transparency: Institutions must document the assessments and controls carried out on third-party providers and the resulting incidents. They should ensure clear and transparent communication with regulators, in particular for incidents affecting critical third-party providers.

8. Resilience and redundancy strategies

 

Critical dependency management: Redundancy solutions and failover options to other providers or in-house solutions should be considered for critical services to reduce dependency on a single provider.

System redundancy and transfer of activities: For critical infrastructure and services, it is recommended that redundant systems be put in place and that options for transferring activities to other solutions be provided in order to minimise potential interruptions.

 

It should be noted that the EBA guidelines include specific rules for outsourcing to the cloud and require :

Advanced planning: Institutions must assess the risks of data localisation, provider dependency and operational resilience.

Contractual clarity: Institutions must ensure that their contracts with cloud providers include provisions on data confidentiality, information security, auditing and reporting.

Enhanced monitoring: Periodic audits, compliance assessments and resilience mechanisms (including rollback or migration options) are required.

Conclusion

In conclusion, financial institutions need to implement an integrated approach to managing third-party risks, including governance policies, rigorous evaluation and selection processes, well-defined contracts, ongoing monitoring of service provider performance and continuity plans, while paying particular attention to critical service providers, such as cloud service providers.

Resilience testing and transparency with regulators are also essential to ensure compliance and resilience to external risks. These measures ensure that institutions can operate safely and maintain the continuity of their services, even in the event of the failure of a critical service provider.