non-public information – Compliance Guru

In Part 1 I said that vendor management, just as any other risk management endeavor, consists of 3 basic phases;

Identify the risk
Assess the risk, and
Control the risk

I also discussed why risk identification was a more difficult task today because of the “access to data” question, and also because “data” includes not just NPI, but confidential data as well. Everyone from your technology providers to the office cleaning crew could have access to non-public or confidential data, and as a result must be included in Phase 2; the risk assessment. The good news is that even though all vendors must be assessed, only a handful will required significant follow-up in terms of controls reviews (phase 3).

So in this post I will discuss how the risk assessment of vendors has changed over the last few years. Traditionally assessing a vendor was limited to determining the extent to which the vendor had access to (and could possibly disclose) non-public customer information (NPI). This grew out of GLBA, specifically the privacy and security elements of the legislation. Today regulators expect a much broader assessment of third-party risk. In addition to NPI, you must also assess vendor access to confidential information, such as HR records, Board reports, strategic plans and unaudited financials. You should also understand how a failure of the vendor’s product might affect your ability to deliver critical products or services to your customers. Does the vendor provide interdependencies to critical products? If they failed, how many of your services would fail too? Additionally, how difficult (costly & time consuming) would it be to find an alternate vendor, should the need arise?

In a recent speech to a community bankers group, Thomas J. Curry (current FFIEC chairman and Comptroller of the Currency) stated:

“While they have important benefits and are in many ways an essential part of business, it can be easy for financial institutions to become overly dependent upon third parties and overly-trusting. But just because these contractors have long client lists and hard-to-duplicate expertise doesn’t mean they are infallible.”

So vendor risk assessments really come down to determining “will they or won’t they?”:

Will they or won’t they…disclose customer NPI?
Will they or won’t they…disclose confidential information?
Will they or won’t they…fail?
Will they or won’t they…meet the terms of the contract?
Will they or won’t they…continue to meet our strategic objectives?
Will they or won’t they…properly manage their third-party relationships?

Once these questions have been addressed (i.e. asked and answered) you have a good idea of the raw, or inherent, risk level. Now you are expected to…

“…have risk management practices in place that are commensurate with that risk.”

Asking the right “will they or won’t they” questions are the key to accurately assessing inherent risk. The next step is to manage (i.e. control) the risk at acceptable levels. More on that in Part 3.

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Service provider oversight (aka vendor management) is undoubtedly the hottest hot-button item on the regulator’s agenda right now, and for good reason. For one thing, regulators know that the vast majority of financial institutions outsource at some point, in fact recent studies put the number of FI’s that either transmit, process or store information with third-parties at over 90%. They also know that most recent cyber security incidents affecting financial institutions involved third-party service providers. (The Chase breach is a notable exception.) And increased scrutiny of your vendor oversight program has been cited as a focal point for the ongoing regulatory cybersecurity assessments. Clearly a new vendor management standard is here, and a new expanded approach is required.

I’ve broken the vendor management process into 3 parts, and all areas must be expanded;

Risk Identification
Risk Assessment, and
Risk Management

Again, all three areas have increased expectations. You are expected to manage the risks of third-party relationships the same way you manage internal risk, and step 1 is always to identify the source of the risk. This is relatively simple when all data is stored and processed in-house, but that doesn’t reflect the current outsourced model. So identifying the source of the risk means asking the following question about the third-party…“do they or don’t they have access to my information”?

“Access” means everything from incidental read-only (as in a piece of paper or computer screen), to full read & write. In other words, vendors that provide or support critical processes clearly must be assessed, but anyone that might be allowed in your facility could conceivably see something non-public or confidential. And the definition of “information” has evolved from strictly non-public customer information (NPI), to anything you consider confidential, such as Board reports, HR records, strategic plans, and unaudited financials.

But I think the biggest challenge for most financial institutions is in understanding exactly how to define a “service provider”. The traditional thinking was that only at a few key providers (like core) were defined that way, but the definition of “service provider” has definitely expanded. In fact the Federal Reserve issued a regulatory update in 2013 titled “Guidance on Managing Outsourcing Risk“. In it, they defined “service providers” as

“…all entities that have entered into a contractual relationship with a financial institution to provide business functions or activities”.

The OCC defined it even more broadly, stating in their 2013 update “Risk Management Guidance on Third-party Relationships” that;

“…a third-party relationship is any business arrangement between a bank and another entity, by contract or otherwise.” (Emphasis added.)

So expand your definition of “access”, and expand your list of providers to include all potential sources of risk… from your core provider to your cleaning crew, all third-party relationships with all levels of access should be assessed.

One more thing, don’t forget to assess vendors that may not have access to sensitive information, but have a high degree of criticality. More on that in my next post on Risk Assessment.

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Tag: non-public information

Vendor Management in 3 Parts. Part 2 – Risk Assessment (or, “will they or won’t they?”)

Vendor Management in 3 Parts. Part 1 – Risk Identification (or, “do they or don’t they?”)