To protect companies from threats, a keen understanding of third-party risk management regulations is essential. It can help decision-makers make fully informed choices for the welfare of the company.
Collaborations with third-party entities have undeniable advantages. These partnerships can improve the functionalities and performance of companies. But without a proper risk management system in place, vulnerabilities may emerge that can prove harmful in the long run.
Full compliance with protocols will ensure that company operations will not experience interruptions and consumer disruptions. It will also provide a wall of protection against security incidents, significant penalties and hefty fines.
Types of Risks
Vendor management regulations are put in place to protect against several types of risks because of third-party partnerships. Let’s take a look at some of the risks that companies can face:
- Compliance risk. These are penalties and fines for violations or noncompliance with laws, government regulations, internal policies and business standards. To ensure that companies are consistent with these regulations, they must have adequate audit monitoring and oversight functions.
- Publicity risk. Negative public perception of a company may result from the poor performance of a third-party partner. This can significantly affect its community standing and even its stock market performance.
- Credit risk. When a third-party vendor fails to meet its contractual terms with a financial institution, this is a credit risk. A basic form of credit risk is the financial condition of the third-party partner itself. There must be sufficient monitoring to keep the credit risk with limits approved by the board.
- Strategy risk. This happens when a third-party proves inadequate as a strategic partner and fails to realize a return on investment for the company. These are situations that were not planned accordingly with the long-term vision of the company.
- Operation risk. Third-party vendors typically integrate the internal processes of their partner company as part of its workflow. This can increase organizational complexity and operational risk when a loss occurs because of failed internal processes.
- Transactional risk. Problems arising from failure of product or service delivery by a third-party can result in transactional risks. This can happen due to human error, technology failure, fraud, or inadequate capacity. The lack of contingency plans will increase the burden of these risks.
A System for Managing Risks
Third-party risk management should be in place to protect against the risks mentioned above.
It starts with knowing the third-party partner and instituting a plan for collaboration. There should also be a thorough study of their cost compared to the quality of their work.
Before selecting the third-party partner, there must also be due diligence in shortlisting vendors to meet the company’s requirements. Verify their track record, advantages, disadvantages and compliance with regulations.
Third-Party Risk Management Regulations from the Government
To help with third-party risk management, there are several laws in place to oversee and mitigate any vulnerability or threat. It is essential to study these rules and regulations to avoid problems down the road. There are no excuses for neglect or ignorance of the law.
Data Protection and Cybersecurity
In recent years, data hacks and breaches have grown in number. There are several rules and regulations that focus on cybersecurity and data protection, giving businesses the assurance that they have the full protection of the law.
Third-party vendors should maintain the data privacy of customers at all costs. There must be a robust information disclosure and security protocol in place.
In Europe, there is a comprehensive law that protects personal information and data. This is the General Data Protection Regulation (GDPR). The purpose of this law is to give back control of data privacy and security to individuals. It also focuses on the transfer of this personal data from outside of the European Union.
America doesn’t have a centralized federal level law. But there are vertically-focused US data privacy laws such as the following:
- US Privacy Act of 1974. Government agencies have rights and restrictions of data.
- Health Insurance Portability and Accountability Act (HIPAA). Personal data protection for health insurance and health care.
- Gramm-Leach-Bliley Act. Protection of non-personal financial information.
- Children’s Online Privacy Protection Act (COPPA). Personal information about children 12 years younger must be protected.
There are also specific laws at the state level that attend to data protection and cybersecurity. One of the most prominent is the California Consumer Privacy Act that took effect on January 1, 2020. Among its provisions are giving consumers the right to know what personal data is being collected about them and the ability to say no to the selling of personal data.
Disruptions of Operations
Some laws help protect companies from disruptions when engaging in third-party partnerships.
For instance, Section 5 of the Federal Trade Commission Act prohibits deceptive marketing practices. The Equal Credit Opportunity Act has made it illegal for discriminatory lending practices.
If a third-party vendor engages in these prohibited acts, it will significantly affect the partner company’s operations, especially from a financial and reputational standpoint.
Government agencies have also been giving more attention to the emerging ecosystem of third-party collaborations.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency tasked with maintaining public confidence and stability in America’s financial system. Created by Congress, they have reviewed the risk management program of third-party relationships that financial institutions have entered.
The assessment focuses on the safety of consumer protection and compliance with applicable policies, regulations and laws. They examine third-party relationships as though they are part of the partner institution itself.
Elevating the stakes when it comes to third-party relationships, the US Office of the Comptroller of the Currency stipulated that all banks must manage their third-party vendors.
Companies should always be hands-on with their partnerships because any neglect or violations from the third-party vendor will reflect poorly on the partner company.
The Importance of Regulations
A global survey by Deloitte in 2016 noted that eight industries rely significantly on third-party relationships. These include:
- Energy and Resources
- Public Sector
- Financial Services
- Consumer Business
- Healthcare and Life Sciences
- Technology, Media and Telecom
- Infrastructure, Business and Professional Services
Out of the 170 companies that participated in the survey, many had annual revenues exceeding $1 billion US dollars. This is significant because of the impact of third-party partners in their operations. Eighty-seven percent of them have experienced a disruptive incident with third-party vendors in the last two or three years.
Twenty-eight percent of these can be categorized as a significant disruption, while 11 percent experienced a complete failure of the third-party partners.
With their massive operations, these failures have an enormous impact on the industries the companies are in. Regulations of third-party risk management make it easier to prevent or eliminate these failures.
The Reality of Threats
The extended enterprise that third-party partners provide has exposed businesses to various threats. Consider the following:
- Twenty-six percent of the Deloitte survey respondents suffered reputational damage.
- Twenty-three percent had third-party partners that did not comply with regulations.
- Twenty percent experienced high-level breaches of sensitive consumer data.
As a response to these threats, 86 percent of the respondents have required third-party risk management from their partners.
But even if these were mandatory, the confidence level is still low. A majority amounting to 94.3 percent, expressed only short to moderate confidence levels with the tools available to manage third-party risks. Furthermore, 88.6 percent of respondents have shown low to moderate confidence as well when it comes to the actual risk management process.
The Shift to Flexibility and Scalability
In the past, the dominant motivation for companies to engage in third-party relationships is to reduce costs. The horizon has changed. More companies are now seeing the value in scalability and flexibility as critical reasons why third-party engagement is valuable.
Another emerging thread behind using third-party partnerships is its capability to introduce innovation in their product or service. Third-party vendors have increasingly improved their skill specializations, making them more valuable to companies.
Third-party risk management ensures that inherent risks the company will be exposed to will not neutralize the benefits that third-party providers bring.
Manage the risks well and avoid compliance penalties and fines. If companies can succeed in this endeavor, they can use their third-party relationships as an industry edge against their competitors.
How to Prepare for Regulations
Companies should refer to relevant regulations when accomplishing vendor risk management. It includes the following steps:
- Vendor selection
- Track record assessment
- Due diligence on risks
- Continuous monitoring
- Reporting of contract management
Invest in training and education for the latest industry analysis and best practices. There must be protocols for front-line managers who directly interact with the vendors to understand group level roles.
Monitoring and Assurance Activity to Mitigate Risks
To help offset risks, it is essential to undertake critical initiatives such as consistent monitoring and assurance activities with third-party vendors. This starts with enhanced transparency, visibility and communication with the third-party partners.
A more disciplined approach when it comes to contract is also an emerging risk mitigator. Business cases and due diligence in the involvement of third-parties should also help alleviate concerns.
In several CEO or board-level meetings, the issue of third-party risk management has been gaining more prominence. This is a reflection of the importance of third-party relationships. This is a reflection of the importance of third-party relationships. Third-party involvement is now a leadership issue and not merely an aspect of operations.
Assurance activities include more frequent visits to the actual location of the third-party partner. This strengthens the ties of the partnership by being more involved in the processes of the third-party vendor.
Alternative Assurance Activities
Apart from on-site visits, companies can choose various ways to ensure third-party partners’ performance levels. The following activities can help improve compliance:
- In-house internal audit
- Third party control self-assessment
- Remote access to third-party data
- Audits via desktop
External audits can also be an option under SSAE16 or ISAE3402 standards. But note that this only covers misstatements of material financial statements. What is needed is a more comprehensive approach that will cover a wide array of company aspects such as reputational, strategic, legal, operational and regulatory.
Third-party risk management regulations is a complicated process.. A company needs an experienced partner to manage essential data and information systems their third-party vendors will use.
RSI Security has years of expertise in setting up a third-party risk management system. Our team can create a 24/7 security buffer between third-party data at risk and potential attacks from cybercriminals. Among our critical services include the following:
- Vendor Assessment. RSI Security will help conduct a third-party risk assessment to determine the third-party partner’s data security vulnerability.
- Risk Management. We will interact directly with third-party vendors to reduce risks and threats consistently.
- Managed Security. Our services will provide resources to protect sensitive industry data from imminent cyber-attacks. RSI Security has an updated database that keeps up with the evolving nature of cybersecurity vulnerabilities and threats.
- Regulatory Compliance. Our team of experts is well-versed with the relevant government regulations that third-party relationships must observe with full compliance. There is an emphasis on legal requirements for data privacy and security.
Our expert analysts have the technology tools to reduce or eliminate these risks. Trust RSI Security to oversee your third-party partnerships’ health and ensure that regulatory compliance is always in excellent shape.