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

Before approving an outsourcing arrangement for a material activity, which action best reflects a risk-based approach under the supervisory guidance?

The bank should assess how material the activity is and how capable the provider is, then set due diligence and ongoing oversight in proportion to the risk. Uniform treatment, reliance on provider claims, or ignoring exit planning does not meet a risk-based approach.

  1. AApply identical due diligence to all providers regardless of the activity's importance
  2. BAssess the activity's materiality and the provider's capabilities, then set oversight proportionate to the riskCorrect
  3. CRely solely on the provider's marketing statements about its controls
  4. DSkip exit planning because the contract is long term

Explanation

A risk-based approach scales due diligence, contractual protections and ongoing monitoring to the criticality of the activity and the provider's risk. Identical treatment ignores materiality, and relying on marketing claims or skipping exit planning is inconsistent with sound practice.

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