Navigating Regulatory Expectations: Strengthening Third-Party Risk Framewor

Introduction

In today's interconnected business landscape, organizations increasingly rely on third-party vendors to deliver essential services. While this strategy offers operational efficiencies, it also introduces significant risks, particularly in the realms of cybersecurity, compliance, and operational resilience. Recognizing these challenges, regulatory bodies worldwide are intensifying their focus on third-party risk management (TPRM), compelling organizations to reassess and fortify their risk frameworks.

The Rising Tide of Regulation

Regulatory expectations surrounding third-party risk have evolved rapidly, reflecting the growing complexity and interdependence of modern supply chains. Key regulatory developments include:

• Digital Operational Resilience Act (DORA): Enacted by the European Union, DORA mandates financial entities to enhance their digital operational resilience, emphasizing the management of ICT third-party risks. It requires comprehensive risk assessments, contractual obligations, and continuous monitoring of third-party service providers. [EIOPA - DORA]
• Basel Committee Principles: The Basel Committee has proposed 12 principles for managing outsourcing risks in banks, underscoring the board's responsibility in overseeing third-party arrangements and ensuring robust business continuity plans. [Reuters]
• FINRA's 2025 Guidance: The Financial Industry Regulatory Authority (FINRA) emphasizes the need for comprehensive TPRM policies, due diligence, and incident response planning, particularly concerning cybersecurity threats and the use of AI by third-party vendors. [Shumaker]

These regulations signal a paradigm shift, where regulators expect organizations to not only identify and assess third-party risks but also to implement proactive measures to mitigate them.

Where Frameworks Fall Short

Despite advancements in TPRM, many organizations struggle to meet regulatory expectations due to:

• Insufficient Risk Assessments: Organizations often lack comprehensive assessments that consider the full spectrum of third-party risks, including operational, reputational, and strategic risks.
• Inadequate Monitoring: Continuous monitoring of third-party performance and risk exposure is frequently overlooked, leading to delayed responses to emerging threats.
• Poor Contractual Agreements: Contracts may not clearly define responsibilities, performance metrics, or remediation procedures, resulting in ambiguities during incidents.
• Limited Board Oversight: Boards may not be adequately informed or involved in TPRM, hindering strategic decision-making and accountability.

Addressing these shortcomings is essential for organizations aiming to align with regulatory standards and safeguard their operations.

Regulatory Expectations in Practice

Regulators expect organizations to implement robust TPRM frameworks that encompass:

• Comprehensive Due Diligence: Prior to engaging third parties, organizations should conduct thorough evaluations of their financial stability, cybersecurity posture, and compliance history.
• Detailed Contractual Agreements: Contracts should outline specific obligations, performance standards, data protection measures, and termination clauses.
• Ongoing Monitoring and Auditing: Regular assessments of third-party performance, risk exposure, and compliance are crucial for early detection of issues.
• Incident Response Planning: Organizations must establish clear protocols for responding to incidents involving third parties, including communication strategies and remediation steps.
• Board Involvement: Boards should receive regular updates on third-party risks and be involved in strategic decisions related to TPRM.

By adhering to these practices, organizations can demonstrate their commitment to regulatory compliance and risk mitigation.

Building a Resilient TPRM Framework

To strengthen TPRM frameworks, organizations should consider the following steps:

1. Establish Governance Structures: Define roles and responsibilities for TPRM across the organization, ensuring accountability and oversight.
2. Implement Risk Segmentation: Categorize third parties based on risk levels to prioritize monitoring and resource allocation.
3. Develop Comprehensive Policies: Create policies that address third-party selection, onboarding, monitoring, and offboarding processes.
4. Leverage Technology: Utilize tools for risk assessment, monitoring, and reporting to enhance efficiency and accuracy.
5. Conduct Training and Awareness Programs: Educate employees on TPRM policies, procedures, and the importance of managing third-party risks.

These measures can help organizations build resilient frameworks capable of adapting to evolving regulatory landscapes.

Technology as an Enabler

Advancements in technology offer opportunities to enhance TPRM:

• Automation: Automating risk assessments and monitoring can improve efficiency and reduce human error.
• Artificial Intelligence: AI can analyze vast datasets to identify patterns and predict potential risks associated with third parties.
• Integrated Platforms: Centralized platforms can provide a holistic view of third-party relationships, facilitating better decision-making.

By embracing technological solutions, organizations can proactively manage third-party risks and meet regulatory expectations.

Case Study: A Compliance-Driven Overhaul

Consider a financial institution that faced regulatory scrutiny due to inadequate TPRM practices. The organization undertook a comprehensive overhaul, which included:

• Implementing a centralized TPRM platform to streamline processes.
• Conducting thorough risk assessments for all third-party vendors.
• Revising contracts to include clear performance metrics and incident response procedures.
• Establishing a dedicated TPRM committee to oversee risk management activities.

As a result, the institution not only achieved regulatory compliance but also enhanced its operational resilience and stakeholder confidence.

Conclusion

In an era of heightened regulatory scrutiny, organizations must prioritize the strengthening of their third-party risk frameworks. By understanding regulatory expectations, addressing existing gaps, and leveraging technology, organizations can build resilient TPRM programs that safeguard their operations and reputation. Proactive engagement, continuous improvement, and strategic oversight are key to navigating the complex landscape of third-party risk management.