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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 platform to a third-party provider. Under the Federal Reserve's guidance on managing outsourcing risk, which statement best describes the board of directors' and senior management's responsibility?

The board and senior management stay fully responsible for an outsourced activity as if the bank performed it internally. Contracting with a provider does not transfer accountability, so they must ensure a proper risk management program and oversight are in place for the arrangement.

  1. AResponsibility for the outsourced activity transfers to the service provider once a contract is signed
  2. BThe board and senior management remain responsible for the outsourced activity as if the bank performed it itself, and must ensure appropriate risk management oversightCorrect
  3. CResponsibility is limited to approving the budget, while operational staff handle all risk assessment
  4. DResponsibility applies only to outsourcing arrangements that involve foreign service providers

Explanation

The guidance stresses that outsourcing does not reduce the bank's responsibility for safe and sound operation and compliance with laws. The board and senior management must ensure the activity is overseen with a risk management program. The claim that responsibility transfers to the provider is the key misconception.

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