Fed's Board of Governors Issues Guidance on Service Providers
The Federal Reserve Board on December 5 officially reminded Fed-supervised financial institutions to exercise appropriate risk management and oversight when using service providers.
A service provider is any entity—such as a consultant—that contracts with a financial institution to furnish business activities, such as accounting, auditing, loan review, compliance, and risk management.
The guidance issued by the Fed describes factors institutions should consider when choosing a service provider and how institutions should oversee service providers. The guidance does not discourage financial institutions from engaging service providers, but it says firms should be aware of the potential risks. Financial institutions that do not effectively manage relationships with providers could be exposed to risks leading to reputational problems, financial loss, or regulatory actions, according to the guidance.
The guidance also states that financial institutions are responsible for ensuring that service providers' activities comply with applicable laws and regulations and are consistent with safe and sound banking practices. The guidance applies to Fed member state-chartered banks, bank and savings and loan holding companies and their nonbank subsidiaries, and U.S. operations of foreign banking companies.
December 19, 2013