NEW YORK, Sept. 23, 2013 (GLOBE NEWSWIRE) -- As regulators and the CFPB continue to press for greater third party oversight, many banks continue to struggle with the question: how much is really enough? In the current environment, banks are evaluating the risk of continuing their vendor relationships while weighing the alternatives. Is the growing cost and burden of vendor oversight now tipping the economic scales in favor of in-house solutions? Since the focus on third party oversight accelerated last year, banks have been scrambling for solutions largely based on their interpretation of recent court rulings and evolving regulator guidance. Early CFPB penalties levied against banks prompted several major card issuers to consolidate or even eliminate vendor relationships to reduce compliance workloads and mitigate vendor risk. Does this signal a growing trend as the regulatory heat shifts to mortgages, auto finance, and student loans? As vendor roles are challenged and mitigated, is operational risk reduced or simply taking a new form?
The CFPB stated that banks and other financial institutions may be held responsible for the actions of their third party vendors. Similar to existing bank regulations for third parties, the CFPB called for greater due diligence, setting clear expectations for legal compliance and on-going monitoring of third party activities. The CFPB appears to have the legal authority to directly supervise at least some of the third party companies, instead of working through the financial institution. The legislation has created significant new pressures on the banks to evaluate how their outside business relationships could create more or previously unforeseen risks to consumers.
Many banks reasoned that they could reduce operational risk in the short term by ramping up the intensity and frequency of third party testing and monitoring. Yet for some larger banks, managing a growing schedule of vendor on-site visits has proven challenging. Some compliance teams are even advocating a micro-management approach to policing vendor operations. As a result, some banks are moving beyond oversight and becoming involved in developing vendor staff incentive plans and evaluating individual performance. Vendor reactions are mixed; some are overwhelmed, pushing back, or even walking away from bank business as margins shrink from the intense oversight requirements.
Effective oversight has always been a key factor for successfully managing outsourced relationships. As many banks re-examine and redefine third party roles and responsibilities, the greater opportunity and need is to fundamentally re-assess the business case for outsourcing against longer term strategies and business assumptions. A one size fits all approach will not work; banks need to be mindful of the impact on their own operations, while mitigating third party risk. As banks seek a new balance in their third party relationships, it is critical to build a culture of collaboration and partnership. Success will be realized as review processes are developed to align interests and leverage expertise in both the short and long term.
About Auriemma Consulting Group
Since 1984, ACG has offered comprehensive management consulting, research, Industry Roundtable, and benchmarking services to the financial services industry. ACG consultants are experienced practitioners, drawn from the credit card, private label, auto finance, mortgage, and retail banking industries that we serve. ACG clients include credit card issuers and networks, commercial banks, auto and mortgage lenders, merchants, and industry vendors. With offices in New York and London, ACG offers actionable solutions to help clients make important business decisions to maximize their efficiencies and revenues. For more information, contact Bernie Pasierb at 212-323-7000 or bernie.pasierb@acg.net.