OCC Issues New Risk Management Guidance For Third Party Relationships

Author:Mr Sherwin Root
Profession:Sheppard Mullin Richter & Hampton

The Office of the Comptroller of the Currency published on October 30, 2013 a new Guidance relating to risk management for third party relationships. This Guidance rescinds OCC Bulletin 2001-47, "Third-Party Relationships: Risk Management Principles" and OCC Advisory Letter 2000-9, "Third-Party Risk." Prior to the formation of the Consumer Financial Protection Bureau, OCC-regulated institutions were subject to the rescinded Guidance and Advisory Letter, and OTS-regulated institutions were subject to Thrift Bulletin 83 (since rescinded), "Interagency Guidance on Weblinking: Identifying Risks and Risk Management Techniques," but non-bank lenders were not subject to similar requirements with respect to their relationships with third party vendors. The CFPB then published its vendor management guidance last year. The OCC's new Guidance is the first published by a bank regulator since the CFPB published its guidance, and is therefore the first view we have of current regulatory thinking since that time. This new Guidance, which is considerably more detailed than the CFPB's guidance, may therefore be useful to both banks and non-bank lenders as to the types of things they should consider in building a robust vendor management policy. Among the highlights of the Guidance:

A bank should adopt risk management processes that are commensurate with the level of risk and complexity of its third-party relationships.

A bank should engage in comprehensive risk management and oversight of third-party relationships involving critical activities (i.e., such significant bank functions as payments, clearing, settlements and custody) or significant shared services such as information technology, or other activities that (i) could cause a bank to face significant risk if the third party fails to meet expectations, (ii) could have significant customer impacts, (iii) require significant investment in resources to implement the third-party relationship and manage the risk, or (iv) could have a major impact on bank operations if the bank has to find an alternate third party or if the outsourced activity has to be brought in-house.

An effective third-party risk management process follows a continuous life cycle for all relationships and incorporates the following phases:

Planning: Developing a plan to manage the relationship is often the first step in the third-party risk management process. This step is helpful for many situations but is necessary when a bank is considering contracts...

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