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

A mid-sized bank plans to outsource its loan-servicing operations to an external provider. Under supervisory guidance on managing outsourcing risk, which statement best describes the board's accountability for this arrangement?

The board remains ultimately responsible for an outsourced activity. Outsourcing moves the execution of the work to a provider, but not the accountability, so the bank must apply the same risk management and control standards as it would to an internal function.

  1. AThe board remains ultimately responsible for the outsourced activity and must ensure it is subject to the same risk standards as if performed in-houseCorrect
  2. BAccountability transfers to the service provider once a legally binding contract is signed
  3. CAccountability moves to the bank's internal audit function, which must approve each outsourcing decision
  4. DAccountability is shared equally with the regulator, which approves every outsourcing contract

Explanation

Outsourcing transfers the performance of an activity, not the responsibility for it. The board and senior management stay accountable and must apply the same standards of risk management and control as for internal activities. A contract can allocate service duties but cannot shift regulatory accountability.

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