IMPORTANCE OF EFFECTIVE
THIRD PARTY RISK MANAGEMENT
FOR THE FINANCIAL SERVICES
Over the last two decades, companies in the BFSI (Banking, Financial Services & Insurance) industry
are increasingly outsourcing their core activities to third parties. While this trend provides
operational efficiencies and cost advantages, it also exposes financial services firms to a multitude
of risks. In fact, instances of cyber-attacks, security breaches and data privacy concerns, caused US
financial services firms to pay fines of more than $23Bn in 2018.
As a result, Third Party Risk Management (TPRM) has become more important now than ever. A lot
of BFSI companies continue to be exposed to third party risks due to inadequate risk monitoring and
control measures. Companies often focus on risk management activities during the initial due
diligence phase but fail to monitor and control risks across the third-party engagement life cycle.
This can lead to security or compliance gaps. Some of the key risks that third-parties impose on
financial services firms are below.
Major third party risks for financial services firms
Cyber and Privacy Risk
An organization’s data is lost or security is compromised due to
deficiencies in the cybersecurity and privacy controls
of the third party.
Compliance & Regulatory Risk
Supplier fails to comply with required regulations, causing the client’s
organization to be non-compliant
Risks that stem from a third party’s digital business processes
Negative impact to a company’s brand and reputation due to the occurrence of
certain events at the third party
Third party cannot continue to operate as a financially viable entity, hence
causing a disruption in the client’s core
Legal, regulatory, political and socio-economic repercussions of working
with a third party that does business in a particular country
The risk can increase depending on how the company uses these third parties. If a supplier has
access to customers’ personal identifiable information (PII) and their systems get hacked, all of the
customers’ personal information is compromised. This could not only lead to fines in tens of millions
of dollars, but also cause irreparable damage to the organizations brand and reputation.
A ROBUST THIRD-PARTY RISK MANAGEMENT PROGRAM FOR FINANCIAL SERVICES FIRMS IS THE
NEED OF THE HOUR
Increased reliance on third parties across the industry coupled with stringent regulatory norms and
frequent cybersecurity breach incidents emphasize the immediate need for financial services
companies to set up robust risk management processes. Moreover, effective third-party
management is critical for driving operational excellence and managing costs effectively.
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