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

Senior management at a bank wishes to outsource its payment-processing function to a provider that is also the bank's largest shareholder's affiliate. Which action best fits management's responsibilities under outsourcing risk guidance?

Management should subject the affiliated provider to the same due diligence and arm's-length terms as any unrelated provider and explicitly manage the conflict of interest. Affiliation does not lower risk, and the decision must remain with the bank's own governance structure.

  1. ASkip competitive due diligence because the affiliate relationship reduces risk
  2. BApply the same due diligence and arm's-length terms as for any unrelated provider, and manage the conflict of interest explicitlyCorrect
  3. CDelegate the decision to the affiliate's own risk team
  4. DSeek approval only from the shareholder, not the board

Explanation

Guidance expects management to assess providers rigorously and to identify and manage conflicts of interest, including with affiliates. Affiliation does not reduce the need for due diligence, and decisions cannot be handed to the provider's side or bypass the board.

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