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

A regional bank transfers its loan-servicing back office to an external provider under a multi-year contract. The bank's board asks who remains ultimately accountable for the risks of the outsourced activity. Which answer is consistent with the supervisory guidance on managing outsourcing risk?

The bank's board and senior management remain ultimately responsible for outsourced activities. Outsourcing moves the performance of a function to a provider, but it does not transfer accountability for risk management or regulatory compliance, which stays with the regulated institution.

  1. AThe service provider, because it performs the activity day to day
  2. BThe bank's board and senior management, who retain ultimate responsibilityCorrect
  3. CThe provider's board, once the contract is signed and the service level agreement is in place
  4. DThe bank's external auditor, who reviews the arrangement annually

Explanation

Outsourcing transfers the performance of an activity but not accountability. The regulated institution's board and senior management remain responsible for managing the risks and for compliance with regulation. The provider's performance is governed by the contract, not by a transfer of responsibility.

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