FRM Part I · FRM Exam Part I · Operational Risk
A firm is considering outsourcing its payment processing to a third-party vendor to reduce operational risk from internal system failures. Which statement best describes the effect on the firm's risk profile?
Outsourcing reduces internal processing risk but adds vendor, concentration and reputational risk, and the firm stays accountable to customers and regulators. Risk is transformed, not eliminated, so oversight and contingency planning remain necessary.
- AOperational risk is fully eliminated because responsibility moves to the vendor
- BInternal processing risk falls, but the firm takes on vendor, concentration and reputational risks and remains accountable to customers and regulatorsCorrect
- COperational risk capital becomes zero for the outsourced activity
- DOnly legal risk is affected, with no change in business continuity risk
Explanation
Outsourcing transforms rather than eliminates risk. The firm keeps regulatory and reputational accountability and adds dependence on the vendor. The other options wrongly claim full transfer.
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