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FOR FINANCIAL SERVICE PROVIDERS, MANAGING VENDOR AND THIRD-PARTY RISKS IS CRITICAL

By Rich Cooper, Director of Global Accounts, Fusion Risk Management

 

Regulators Will Hold Firms Responsible; Good News is Technology Is Here to Help

 

Everyone knows there are inherent risks in markets. Investors know and accept the risk that their investments may lose value. For the financial services companies that facilitate and stand behind the trades of ordinary investors, there are risks largely unseen by the public that must be reckoned with on a constant basis.

 

Financial Service (FS) providers (banks, brokers, asset managers, etc.) must work with a variety of vendors and third parties to be competitive in attracting investors as well as keeping their clients’ business. They range from back-office and IT outsourcing vendors to third-party trade-clearing, settlement and money-transfer providers. The economic services provided by the finance industry encompass a broad range of businesses that manage money, including credit unionsbankscredit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokeragesinvestment funds, individual managers and some government-sponsored enterprises. Many of these relationships are intricate and multi-layered with risks imbedded in every layer. A vendor or third party providing direct services to you as an FS provider may also have several relationships with others that could put your direct relationship at risk.

 

Just this month (December 2019), the Bank of England (the Bank), Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) published proposed new expectations to strengthen operational resilience in the financial services sector. This is major next step in evaluating “operational resilience” in the Financial Sector (in the UK defined as UK banks, building societies and investment firms (banks); and the Society of Lloyd’s and its managing agents (insurers) collectively called “Firms” and  also Financial Market Infrastructure collectively called “FMI’s”). It likely will become policy in the UK in 2021, The European Union and Singapore by 2022 and possibly the U.S. soon as well.

 

The Federal Financial Institutions Examination Council (FFIEC) in the US came out with new guidance as well this month. The guidance notes: “Business Continuity Management (BCM) is the process for management to oversee and implement resilience, continuity, and response capabilities to safeguard employees, customers, and products and services. Disruptions such as cyber events, natural disasters, or man-made events can interrupt an entity’s operations and can have a broader impact on the financial sector. Resilience incorporates proactive measures to mitigate disruptive events and evaluate an entity’s recovery capabilities. An entity’s BCM program should align with its strategic goals and objectives. Management should consider an entity’s role within and impact on the overall financial services sector when it develops a BCM program.”

 

Two areas that present the most significant risk management and compliance challenges to FS providers are:

  1. Financial Market Infrastructures (FMI). These are critically important institutions responsible for providing clearing, settlement and recording of monetary and other financial transactions. A payment system is a set of instruments, procedures and rules for the transfer of funds between or among participants. An example is the SWIFT network for global banking and payments. In the US, the Federal Reserve Board supervises most market infrastructures.

 

  1. Outsourced Technology Services. FS providers that rely on third parties to provide operational services need those vendors to have sufficient resources and recovery capabilities in the event of a disruption. The FFIEC, which has a handbookfor business continuity management (BCM) planning, warns that: “Financial institutions should recognize that using such providers does not relieve the financial institution of its responsibility to ensure that outsourced activities are conducted in a safe and sound manner.”

 

The primary concern of regulators is the “systemic risk” that individual vendors and third parties present to the overall health of the financial/economic eco-system. Recall the snowball effects that the failures of several large broker-dealers and investment banks had in precipitating the great financial crisis of 2008. Regulators are also concerned that the FMIs, if not properly managed, can result in significant violations of consumer laws and regulations and expose an institution to supervisory enforcement action, as well as financial, legal and reputational risks.

 

This is the most important point to remember – as an FS provider, you OWN THE RISKS.

 

So, what can you do to mitigate your risks?  As best practice, you should:

  • Mark all of your vendor and third-party relationships from end-to-end. As an example, in payments and settlements, you vitally need to understand who your third parties are, where they are and what risks they may present. You need to plan on how you can mitigate those risks to the greatest extent possible.
  • Make sure everyone in your organization who is responsible for these risks is informed – including C-suites and boards. The FFIEC handbook emphasizes that “the responsibility for properly overseeing outsourced relationships lies with the financial institution’s board of directors and senior management.”
  • FS providers should do a deep dive into their current systems, their limitations and their liabilities. Many firms still have legacy systems with risks assessments built into spreadsheets or printed documents. State-of-the-art BCM systems allow for information inputs from across the organization with advanced technologies employed in risk assessments.
  • Some firms keep their databases in silos (i.e.: equity trading department; mutual fund department) where one silo can be unaware of the risks of the other, putting the entire firm in jeopardy. A holistic system that covers the enterprise and allows prompt reporting to the board level is not a luxury. It is a must for today’s FS providers.
  • Your system must be stress-tested constantly and vigilantly. Game-playing scenarios are helpful in identifying “what if’s?” as well as planning work-arounds for potential disruptions.
  • Identifying “acceptable risks” is important as well. A one-hour outage may not be desirable, but it may be acceptable and not have any regulatory ramifications for your firm. But a 72-hour outage would be vastly different, as access to cash reserves and insurance may be limited or non-existent and your legal liabilities could be piling up.

 

If you think this is complex, you are right. Operational disruptions to the products and services that firms and FMIs provide have the potential to cause harm to consumers and market participants, threaten the viability of firms and FMIs and cause instability in the financial system.  There are new regulations on the way to mitigate this risk to the economy and managing 3rd (and fourth) parties is a key area of discussion.

 

The infrastructure of financial institutions and FS providers is much like a tapestry whose resilience depends on the strength of the weave. But don’t be deterred by the complexity. The good news: there are technology-empowered platforms that can help you manage your vendor and third-party risks.

 

An effective outsourced business continuity management program will provide the framework to successfully manage your vendor and third-party risks now. It will employ up-to-date technology; will break down silos, and will identify, measure, monitor and mitigate the risks that otherwise may keep you up at night.

 

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INTERNATIONAL BANKING NETWORK EXPANDS AS IT WELCOMES STANDARD CHARTERED BANK

IBOS Association (IBOS), an international banking network, is delighted to announce its newest member to the group, Standard Chartered Bank.

A unique international alliance of some of the largest banks in the world, IBOS members collaborate to serve each other’s’ international clients in markets where they themselves do not operate. Standard Chartered’s rich history and extensive network across Asia, Africa and the Middle East will complement IBOS’s strong geographic coverage in Europe and the Americas, thereby creating compelling global opportunities for clients of all member banks.

IBOS Managing Director, Manoj Mistry, commented: “I am delighted that Standard Chartered is joining IBOS, further strengthening our network across this key region and opening more doors in Asia for our clients. We are relishing this next chapter and we are thrilled to be working with Standard Chartered.”

Standard Chartered will initially add Hong Kong, Singapore, India, China, Taiwan and Malaysia to the IBOS network. In time, both parties will explore expanding the relationship to additional markets where Standard Chartered operates.

Speaking on behalf of Standard Chartered, Jiten Arora, Global Head, Commercial Banking, commented “Helping businesses to connect and grow internationally is central to our brand promise. We are pleased to be a part of IBOS, which will further strengthen our role as a strategic partner in our clients’ growth journeys. We also look forward to supporting internationalising mid-corporate clients of member banks, who are keen to venture into the markets across our footprint and using our deep local knowledge to help them enter, navigate and prosper by accessing some of the most vibrant economies, trade corridors and supply chain ecosystems globally.”

Despite the current pandemic, IBOS remains open for business and the network is utilising technology to succeed at achieving its goals and ensuring clients continue to have access to services as normal. IBOS also has its sights set on growth into the markets that the ever changing economic and geographical developments demand, as it continues to develop its expansion into Australasia.

Moreover, Manoj notes that: “Additional markets across CEE are also being contemplated to serve the network as other banking association groups are starting to wind down.”

Matt Tuck, Head of Commercial Product, Service & Operations at NatWest Group, said “As a long-standing member of IBOS since its inception in 1994, NatWest Group is delighted that with Standard Chartered’s membership IBOS is extending its reach into Asia for the first time. As a market leading UK Commercial Bank, NatWest Group is looking forward to working even more closely with IBOS to support our clients’ international banking needs across this region.”

“The addition of Standard Chartered presents an incredible growth opportunity for the IBOS network and for its members,” said Chris Ward, executive vice president and head of product management & operations, PNC Treasury Management and IBOS chair and board of directors’ member. “The continued global expansion of the network will help to provide our members’ customers with the service and resources they need to be successful.”

 

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ARE MIDDLE EAST ENTERPRISES PREPARED FOR THE FUTURE?

Deloitte releases 2020 tech trends report

 

Deloitte’s 11th annual report on technology trends captures the intersection of digital technologies, human experiences, and increasingly sophisticated analytics and artificial intelligence technologies in the modern enterprise. The report explores digital twins, the new role technology architects play in business outcomes, and affective computing-driven “human experience platforms” that are redefining the way humans and machines interact.

During the current COVID-19 crisis, organizations have been turning more and more to technology to enhance business resilience and continue to operate. As organizations are forced to utilize remote working where possible or take pause, many are also realizing the benefits of this way of working as an option post COVID-19, to improve efficiencies and become more agile.  While currently dominated by communication technologies, building resilience will also require us to closely examine, and build on, trends such as ethical technology and trust, human experience platforms and architecture, and the macro forces of digital experience, cloud and risk.

“The most successful businesses today are combining cutting-edge technologies like machine learning and IoT with disruptive IT architecture and supercharged talent to create entirely new ways of working – and they already see the benefits,” said Bhavesh Morar, Lead Partner for Enterprise Technology and Performance, Deloitte Middle East. “And with enterprises needing to adapt and respond quickly to ongoing technology disruption, Deloitte expects to see more IT and finance leaders working together to develop new flexible approaches for funding innovation.”

 

The Deloitte report’s five trends of focus for 2020 include:

  • Digital Twins – Bridging the physical and digital:Digital twin technology allows businesses to create increasingly sophisticated virtual models to optimize processes, products, and services, enterprises will integrate IoT, machine learning, advanced computing infrastructure, and more to unlock entirely new business models.
  • Architecture Awakens:Systems architecture will become a strategic priority as enterprises redefine the architect role to be more nimble, responsive, and collaborative. Architects will work across the business and work creatively with non-technical project teams – forming a competitive differentiator in the digital economy.
  • Ethical Technology and Trust:Enterprises in every geography are realizing that their embrace of technology is an opportunity to gain – or lose – trust, and with it, customers’ business and brand loyalty. CIOs will emphasize ethical tech in the coming years – and create processes to help solve ethical dilemmas related to disruptive technologies.
  • Human Experience Platforms:To address the lack of connection humans often experience with daily digital interactions, a growing number of enterprises are injecting emotional intelligence into their systems. These include AI capabilities such as machine learning and voice and facial recognition, which can better detect and appropriately respond to human emotions. The net result is emotionally intelligent human experiences that leverage connections between people, systems, data, and products.
  • Finance and the Future of IT: As enterprises become more agile, financial operations will need to support new modes of working. That means CIOs and CFOs will need to explore how a new, flexible approach to enterprise finance¾across budgeting, contracting, capital planning, and more¾can redefine the future of tech innovation.

“Enterprises in the Middle East are no longer satisfied with being regional leaders – now the ambition is to go global and lead globally. There is a growing interest in looking beyond what’s new to what’s next. At present, many enterprises are looking to strengthen their structures, capabilities, and processes required to harness technology macro forces and innovate effectively in the face of exponential change,” concluded Morar.

 

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