2017 is already proving to be a very difficult year for bank boards. While being on a board can be a rewarding experience, increasing regulatory pressures certainly don’t make the position and its corresponding responsibilities any easier.
One particular area of intense focus by the regulators is third-party risk management. Ultimately, the regulators have stated that it is your responsibility to ensure that you have a third-party risk program in place that addresses your vendors and the level of risk they pose.
Aside from potential enforcement actions and fines from the regulators, an inadequate third-party risk program can leave your institution ill-prepared or vulnerable to a host of issues. Worsening vendor financial performance could be an indicator of woes to come, such as poor customer service, bugs and issues with its system. Banks that auto-renew vendor contracts could miss a chance to re-negotiate old contracts.
Poor due diligence could mean partnering with a vendor that is damaging to your institution’s reputation. For example, if you don’t understand where customer complaints are coming from and why, regulators could question your ability to properly oversee and monitor your vendor’s performance and manage the corresponding impact on your customers.
While there will always be unforeseen issues you cannot avoid, having an effective third-party risk policy and program in place can ensure your full compliance with the guidance and help steer you to partnerships that will benefit your institution.
And, even when those unforeseen issues do occur, and they will, you’re better prepared to react in an effective and organized manner. To help, here are nine tips to keep you on the right path.
Nine Vendor Risk Management Tips for the Board
1. Read and understand the guidance from your primary regulator as it pertains to third-party risk management. There are key expectations clearly identified in the guidance and they should give you ample fodder for asking your institution’s senior management team pertinent questions.
2. Set expectations and tone from the top. Make sure that from senior management all the way to the front-line customer service representatives, everyone understands his or her responsibilities when it comes to compliance with the rules, as well as how your organization wants to handle vendor-risk management.
3. Have your vendor risk management program thoroughly reviewed for any possible deficiencies and focus on areas that are often overlooked, such as fourth-party risk management or reviewing third parties’ procedures for complaint management.
4. Automate your third-party risk program. Most institutions have already taken the steps away from Excel and other spreadsheet programs in favor of ones that help to manage a complicated network of vendors and regulatory expectations.
5. Involve your internal audit department, compliance team and counsel in evaluating the effectiveness of the vendor management program.
6. Strongly consider making vendor management directly accountable to the board or the most senior risk committee at your institution. Firmly establish its independence from the various lines of business and ensure the needs of vendor management do not fall on deaf ears. Ensure that any issues raised, whether in the course of normal business or during examinations, are promptly and thoroughly addressed.
7. Invite the head of your vendor management program to report regularly at board meetings. A standard set of reports is adequate, but make sure that any concerns or significant issues are clearly called out and reflected in the minutes of the meetings.
8. Ensure those involved in vendor management have adequate resources, such as staffing and a high enough budget, as well as ample training and experience to do the job well. Seek outside independent expertise or outsource tasks where needed, particularly for highly technical items such as business continuity plan reviews for SSAE 18 analysis, attestation standards issued by the American Institute of CPAs.
9. Ask pertinent questions and drill down when anything seems amiss. Use industry news, new regulations and enforcement actions as opportunities to view your own vendor management program through that lens and see if there are areas of concern that should be addressed.
The world of vendor management isn’t easy and your job as a director is incredibly complex and overwhelming at times. Fortunately, done well, vendor risk management can also be a significant strategic advantage, allowing you to do business with well-managed companies in a compliant and cost-efficient manner.