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

A bank's senior management proposes outsourcing its loan-servicing platform to a single vendor. Which action by senior management best fulfils its responsibility for implementing the board-approved outsourcing policy?

Senior management should implement the board's policy by setting procedures to assess materiality and risk, assigning clear ownership of each arrangement, monitoring performance, and reporting regularly to the board on material outsourcing. Relying on the vendor to self-monitor or choosing on price alone does not meet governance expectations.

  1. ADelegating all vendor monitoring to the vendor's own compliance team
  2. BEstablishing procedures for assessing materiality and risk of each arrangement, assigning clear ownership, and reporting regularly to the board on material arrangementsCorrect
  3. CApproving the contract once the vendor offers the lowest price
  4. DReporting to the board only when a service failure has already occurred

Explanation

Senior management must turn board policy into processes: assess materiality and risk, assign accountability, monitor performance and escalate to the board. Relying on the vendor's self-monitoring or on price alone ignores the need for independent oversight. Reporting only after failures is reactive, not a sound governance practice.

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