The Bank of England, in collaboration with the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), has unveiled a series of proposals designed to bolster the resilience of services offered by critical third parties (CTPs) to UK-regulated financial services firms and financial market infrastructure entities (FMIs).
CTPs play a key role in providing a wide array of services to firms and FMIs, contributing to operational resilience and innovation within the financial sector. However, the potential risks posed by disruptions or failures of these critical third parties could have significant implications for the stability of the UK’s financial system.
According to Sam Woods, Deputy Governor of Prudential Regulation and CEO of the PRA, the role of third-party service providers is crucial in the delivery of essential services by banks and insurers. As a result, these arrangements offer numerous benefits but also carry inherent risks. The newly proposed powers aim to effectively manage these risks in a proportionate manner, ensuring the stability of financial services in the UK.
Sarah Breeden, Deputy Governor for Financial Stability, highlighted the need to manage systemic risks by enabling regulatory oversight, emphasizing the growing reliance of financial market infrastructure firms on third-party technology providers. The proposals outlined in the consultation paper build upon prior discussions, aiming to safeguard UK FMIs from potential disruptions while allowing them to benefit from the use of such providers.
Nikhil Rathi, Chief Executive of the FCA, emphasized that well-managed outsourcing can lead to efficiency, innovation, and improved operational resilience. Despite the potential benefits, the concentration of third-party service providers in financial services poses a risk of significant impact in the event of disruptions or failures. The proposed measures seek to enhance the resilience of critical third-party services, thereby supporting market integrity, and promoting UK competitiveness and growth.
The consultation paper contains various proposals, including the process of identifying potential CTPs and recommending them for designation to HM Treasury. Additionally, it outlines fundamental rules applicable to the services provided by CTPs, as well as more detailed operational risk and resilience requirements for their material services to firms and FMIs.
These proposals aim to establish a framework for CTPs to provide relevant information and assurances to regulators, including annual self-assessments and scenario testing to evaluate their ability to deliver material services during severe disruptions. Furthermore, CTPs will be required to notify regulators, firms, and FMIs of specific disruptions that may adversely impact the services provided.
Feedback on the consultation paper will be open until 15 March 2024, following which the regulators intend to publish the final requirements and expectations for CTPs in the second half of 2024. The proposed measures reflect Parliament’s adoption of the Financial Services and Markets Act 2023, granting HMT the power to designate CTPs and providing regulators with the authority to oversee these critical third parties.
In conclusion, the joint proposals presented by the Bank of England, PRA, and FCA are aimed at enhancing the oversight and resilience of critical third parties in the UK’s financial sector. These measures draw from global standards and toolkits, such as the Final report on enhancing third-party risk management and oversight by the Financial Stability Board, and are designed to be interoperable with similar regulations in other jurisdictions. By ensuring effective regulatory oversight of CTPs, the UK aims to fortify the stability and integrity of its financial system.
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