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FRM Part II · FRM Exam Part II · Guidance on Managing Outsourcing Risk

A bank outsources its loan servicing to a provider that in turn subcontracts collections to a third party. Which expectation of senior management is most appropriate?

Senior management should assess and oversee subcontracting risk, usually by requiring contract terms under which the provider remains responsible for its subcontractors and reports on them. The bank cannot disclaim accountability because it lacks a direct contract, and a blanket ban is not required.

  1. ANo responsibility, since the bank has no contract with the subcontractor
  2. BAssess and oversee the risks arising from the subcontracting, including through contract terms that require the provider to manage and report on its subcontractorsCorrect
  3. CRequire the subcontractor to sign a separate contract with the bank's board
  4. DProhibit all subcontracting regardless of the activity's risk

Explanation

Guidance expects the bank to understand and address subcontracting risk, typically via contract provisions on subcontractor use, notification, and the provider's responsibility for subcontractor performance. Disclaiming responsibility is wrong, and a blanket prohibition or board-signed contracts are not required.

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