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

A bank outsources its payment-processing operations to a third-party provider. Which statement best reflects the bank's responsibility under supervisory guidance on managing outsourcing risk once the contract is signed?

The bank's board and senior management remain fully responsible for an outsourced activity and must monitor the provider's performance on an ongoing basis. Outsourcing transfers the execution of the work, not the accountability, so due diligence at onboarding or contract renewal reviews alone are insufficient.

  1. AAccountability for the outsourced activity transfers to the service provider, so the bank only needs to review the contract at renewal
  2. BThe bank's board and senior management remain responsible for the outsourced activity and must monitor the provider's performance on an ongoing basisCorrect
  3. CResponsibility is shared equally between the bank and the provider, so the bank need only monitor activities classed as critical
  4. DThe bank's responsibility ends once the provider has passed initial due diligence

Explanation

Outsourcing does not relieve the board and senior management of responsibility for the activity. The bank must continuously monitor the provider against the agreed standards. Treating the contract as transferring accountability is the key error in the first option.

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