FCA operational resilience: upcoming critical third-party requirements


INSIGHT
Published
Jun 13th '24
Share
Facebook

Operational resilience has become a paramount focus for firms regulated by the Financial Conduct Authority (FCA). As the financial services landscape evolves, the FCA is set to introduce stringent third-party requirements, and their dependencies. This post delves into the forthcoming critical third-party requirements, highlighting their significance and offering guidance on achieving compliance.

 

Understanding operational resilience and third party requirements

Operational resilience refers to a firm’s ability to prevent, adapt, respond to, recover, and learn from operational disruptions. The FCA’s emphasis on this concept aims to ensure that firms can continue to deliver important business services during times of operational stress. This focus extends beyond immediate business continuity to encompass long-term adaptability and recovery.

 

The importance of dependency on operational resilience third-party requirements

In today’s interconnected financial ecosystem, firms often rely on third-party service providers for various critical functions. These dependencies, while beneficial, introduce additional risks. A disruption at a third-party provider can cascade, affecting the firm’s ability to operate effectively. Recognising this, the FCA is introducing new requirements to manage and mitigate these risks.

 

Upcoming FCA operational resilience third-party requirements

The FCA’s new rules on operational resilience, including those specific to third-party management, are designed to bolster the robustness of the financial sector. The key upcoming requirements include:

 

1. Identification of critical third parties

Firms must identify all third-party providers essential to their operations. This identification process should consider the criticality of the services provided and the potential impact on the firm’s ability to continue operations during disruptions.

 

2. Comprehensive risk assessments

Once critical third parties are identified, firms are required to conduct comprehensive risk assessments. These assessments should evaluate the third party’s operational resilience, including their capacity to handle disruptions and their own dependency on sub-contractors.

 

3. Contractual provisions and slas

Firms must ensure that contracts with third parties include provisions that support operational resilience. This includes detailed service level agreements (slas) that specify the third party’s obligations during a disruption, communication protocols, and recovery time objectives.

 

4. Continuous monitoring and review

Ongoing monitoring and review of third-party performance and risk profiles are mandatory. Firms need to implement robust monitoring systems to track third-party resilience continuously, ensuring that any emerging risks are promptly identified and mitigated.

 

5. Incident management and reporting

Firms must develop and maintain incident management plans that include third-party providers. These plans should outline the steps to be taken in the event of a disruption, including clear reporting lines and predefined escalation processes.

 

Steps to achieve compliance

Achieving compliance with the FCA’s new operational resilience requirements necessitates a strategic and structured approach. Here are key steps firms can take:

 

1. Establish a governance framework

Develop a governance framework dedicated to operational resilience. This framework should define roles and responsibilities, including those related to third-party management, ensuring accountability across the organisation.

 

2. Conduct a thorough mapping exercise

Map all critical business services and the third-party providers supporting them. This exercise helps in understanding the interdependencies and pinpointing potential vulnerabilities in the supply chain.

 

3. Perform rigorous due diligence

When engaging new third-party providers, perform rigorous due diligence. Assess their operational resilience capabilities, including their risk management practices, financial stability, and historical performance during disruptions.

 

4. Strengthen contractual agreements

Review and strengthen existing contracts with critical third parties. Ensure that the contracts include clear terms related to operational resilience, such as specific slas, contingency plans, and penalties for non-compliance.

 

5. Implement continuous monitoring tools

Deploy advanced monitoring tools to continuously assess third-party performance and resilience. These tools can provide real-time insights into the third-party’s operational health and alert the firm to any potential issues.

 

6. Develop comprehensive incident response plans

Create and regularly update incident response plans that incorporate third-party disruptions. Conduct regular drills and simulations to ensure that both the firm and its third parties are prepared for various disruption scenarios.

 

Challenges and best practices

While the new requirements are clear, implementing them effectively presents several challenges. Firms may face difficulties in obtaining sufficient transparency from third-party providers, especially those not accustomed to stringent regulatory environments. To address these challenges, firms should adopt best practices such as:

 

1. Building strong relationships

Develop strong, collaborative relationships with third-party providers. Regular communication and joint planning can foster a better understanding of mutual expectations and operational resilience capabilities.

 

2. Leveraging technology

Utilise technology to enhance monitoring and reporting capabilities. Automated tools can help in gathering and analysing data, providing actionable insights that manual processes might miss.

 

3. Engaging in industry collaboration

Participate in industry forums and working groups focused on operational resilience. These platforms provide opportunities to share knowledge, learn from peers, and stay updated on emerging best practices and regulatory expectations.

 

Conclusion

The FCA’s upcoming critical third-party requirements underscore the importance of operational resilience in the financial sector. By proactively addressing these requirements, firms can not only achieve compliance but also enhance their overall operational robustness. The steps and best practices outlined in this article provide a roadmap for firms to navigate the complexities of third-party risk management and build a resilient operational framework capable of withstanding future disruptions.

 

So, are you ready to embark on this journey? Let’s get your firm FCA compliant and poised for growth!
Contact us to book your FCA compliance specialist discovery, today!

 

Contact us if you need assistance in implementing, documenting or testing/auditing your Operational Resilience project.

 

Related:

 

Call us on +44 (0) 20 8087 2377  or email us.

 

If you want to get the right advice, quickly, with clear and totally transparent, unshackling yourself from the confines of an antiquated compliance support service, then contact us.

 

Contact us

 

About us

LS Consultancy are experts in Marketing and Compliance, and work with a range of firms to mitigate risk.

 

We also provide a cost-effective and timely bespoke copy advice and copy development services to make sure all your advertising and campaigns are compliant, clear and suitable for their purpose.

 

Our range of innovative solutions can be tailored to suit your unique requirements, no matter whether you’re currently working from home, or are continuing to go into the office. Our services can be deployed individually or combined to form a broader solution to release your energies and focus on your clients.

 

Contact us today for a chat or send us an email to find out how we can support you in meeting your current and future challenges with confidence.

 

Explore our full range today.

 

Contact us

 

Why Not Download our FREE guides.

 

Call Us Today on 020 8087 2377 or send us an email.

 

FOLLOW US

Connect with us via social media and drop us a message from there. We’d love to hear from you and discuss how we can help.

 

Facebook | Instagram | LinkedIn | X (formerly Twitter) | YouTube

 

Contact us

 

We are Affiliate Members of the Consumer Duty Alliance.