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Board directors of banks must take ultimate responsibility for outsourced services and document how they manage the risk of outages and disruptions to customer services, according to a proposal by the global Basel Committee of banking regulators on Tuesday.
Banks are increasingly relying on third-party tech companies, such as Microsoft, Amazon, and Google, for cloud computing to run key services. This trend has raised concerns among regulators about the potential impact on the financial sector if a major provider used by many banks were to experience a failure.
Recently, banks and telecommunication companies operating in Nigeria experienced significant downtime due to internet outages caused by damage to international undersea cables.
“Ongoing digitalisation has led to rapid adoption of innovative approaches in the banking sector,” the Basel Committee stated. “As a result, banks have become increasingly reliant on third parties for services that they had not previously undertaken.”
The committee, composed of regulators from the G20 and other countries, proposed 12 principles for banks and their regulators to apply, emphasizing that the bank’s board of directors holds ultimate responsibility for oversight of third-party arrangements.
“As with all business processes, documentation evidencing key decisions (e.g., third-party strategy, board minutes reflecting the decision to enter into a critical arrangement) should be maintained in banks’ records,” the Basel Committee said in its consultation paper.
Third-party services have come under increased scrutiny as hackers continually attempt to breach banks’ cyber defenses, undermining operational resilience and causing customer service disruptions for hours or even days.
To address these concerns, the European Union has approved the Digital Operational Resilience Act (DORA) to improve resilience in the financial sector starting next January, with Britain implementing similar measures.
Basel emphasized that banks should undertake “appropriate due diligence” of risks before signing contracts with third parties and continuously monitor the performance of these services.
Banks should also maintain “robust business continuity” management to ensure they can operate during a disruption, Basel stated.
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