On April 24, the Office of the Superintendent of Financial Institutions (OSFI) released a new Guideline B-10 (Revised Guideline B-10), the Third-Party Risk Management Guideline, approximately one year after releasing its initial draft for comment (for more background, read our full analysis of the Draft Guideline B-10).

Consistent with Draft Guideline B-10, Revised Guideline B-10 shifts focus from outsourcing arrangements to setting expectations for federally regulated financial institutions (FRFIs) when managing risks associated with third-party arrangements of all kinds. It also reframes the risk analysis and guides FRFIs in their development and implementation of a risk-based approach to managing third-party risk.

Download a side-by-side comparison of the existing and revised B-10 Guidelines, or see below for the same table on this page.

What you need to know

  • OSFI has provided a transition period ending May 1, 2024 for FRFIs to begin applying Revised Guideline B-10, and OSFI expects that third-party arrangements commencing on or after the end of the transition period adhere to Revised Guideline B-10. Third-party arrangements entered into during the transition period should be reviewed and updated at the earliest renewal or re-opening of the contract so that they adhere to Revised Guideline B-10 by the end of the transition period or as soon as possible thereafter. FRFIs should consider making updates to their policies and procedures, including establishing a third-party risk management framework, to meet that timeline.
  • Revised Guideline B-10 reflects a more comprehensive risk-based approach within an expanded third-party ecosystem used by FRFIs—notably, beyond outsourcings.
  • Revised Guideline B-10 allows FRFIs to take a more nuanced approach than considering the binary questions of outsourcing vs. not outsourcing and material vs. immaterial. It requires FRFIs to consider risk and the degree of criticality when examining third-party arrangements to determine the intensity with which to apply the expectations set out in Revised Guideline B-10. OSFI has confirmed that it expects all third-party arrangements to be analyzed to determine the criticality and risk of the arrangement so that FRFIs can manage the relationship and mitigate risks accordingly.
  • Revised Guideline B-10 recognizes that alternatives to traditional contractual approaches to oversight may be appropriate for certain third-party relationships which are subject to standard contractual terms or where FRFIs otherwise have little room to negotiate terms.
  • Since publishing Draft Guideline B-10, OSFI made the following significant updates:
    • transparency, reliability and security of technology has been added as an expected outcome;
    • further detail regarding the risk analysis to be undertaken by FRFIs has been included;
    • the approach to subcontractors of third-party providers has been modified; and
    • the relationship between Revised Guideline B-10 and other OSFI directives (most notably its advisory on technology and cyber security incident reporting) has been clarified.

Aims and approach

In its letter introducing Revised Guideline B-10, OSFI set out the following aims for the revisions:

  • Address a comprehensive set of third-party risks within an expanded third-party ecosystem, placing emphasis on governance and risk management programs and setting outcomes-focused, principles-based expectations for FRFIs on the sound management of third-party risk.
  • Reflect a principles-based approach with increased emphasis on a risk-based approach to managing third-party arrangements, reflecting the expectation that FRFIs apply Revised Guideline B-10 in a manner that is proportionate to the level of risk and criticality of each arrangement and the size, nature, scope, complexity and risk profile of the FRFI.
  • Adopt a pragmatic approach to managing subcontractor and concentration risks, with FRFIs managing subcontractor risk according to the level of risk and criticality of the given third-party arrangement, taking reasonable steps to manage concentration risks related to their third-party arrangements, and assessing systemic concentration risk to the greatest extent possible.
  • Does not impede the development of a federal framework for consumer-directed data mobility within the financial sector. Once the framework is designed, OSFI may provide relevant guidance as appropriate.
  • Provide adequate implementation time to self-assess and build adherence by May 1, 2024, with the expectation that third-party arrangements commencing on or after the end of the transition period adhere to Revised Guideline B-10 and those entered into during the transition period are reviewed and updated at the earliest opportunity so that they adhere to Revised Guideline B-10 by the end of the transition period or as soon as possible thereafter.

Risk-based approach to applicability

Revised Guideline B-10 addresses concerns raised during the consultation process about the broad scope of the application proposed in Draft Guideline B-10. To address these concerns, Revised Guideline B-10 indicates that FRFIs should consider the risk and criticality of each third-party arrangement to determine the intensity with which to apply the expectations set out in the guideline.

OSFI acknowledges that third-party arrangements may take a variety of forms, ranging from services that are critical to the FRFI to minor support arrangements or strategic arrangements where no services are provided. In light of this, OSFI identifies two key factors to be considered in determining the intensity level at which to apply Revised Guideline B-10: (i) the risk and criticality of each third-party arrangement; and (ii) the size, nature, scope, complexity and risk profile of the FRFI.

Revised Guideline B-10 also includes a more comprehensive list of factors that FRFIs can consider in determining the criticality and risk of each third-party arrangement, as compared to Draft Guideline B-10. These factors are:

Criticality factors

  • the severity of loss or harm to the FRFI if the third party or subcontractor fails to meet expectations due to insolvency or operational disruption;
  • substitutability of the third party, including the portability and timeliness of a transfer of services;
  • the degree to which the third party or subcontractor supports a critical operation of an FRFI; and
  • the impact on business operations if the FRFI needed to exit the third-party arrangement and transition to another service provider or bring the business activity in-house.

Risk factors

  • the probability of the third party or subcontractor failing to meet expectations due to insolvency or operational disruption;
  • the ability of the FRFI to assess controls of the third party and continue to meet regulatory and legal requirements in respect of activities performed by the third party, particularly in the case of disruptions;
  • the financial health of the third party and the “step-in” risk, whereby the FRFI is required to provide financial support to the third party;
  • the third party’s use of subcontractors and the complexity of the supply chain;
  • the degree of the FRFI’s reliance on third parties with elevated concentration risk;
  • the information management, data, cyber security, and privacy practices of the third party and its subcontractors; and
  • any other relevant financial and non-financial risks associated with the use of the third party.

Finally, OSFI has clarified in Revised Guideline B-10 that the due diligence factors in Annex 1 should apply in respect of high and critical arrangements (at minimum), whereas Draft Guideline B-10 was not prescriptive as to the types of arrangements these factors would apply to.

Outcomes and principles

Revised Guideline B-10’s approach is focused on outcomes and principles. FRFIs should keep these principles and outcomes in mind both when designing their third-party risk management programs and when entering into any third-party arrangements.

Revised Guideline B-10 presents six expected outcomes for FRFIs through third-party risk management, which are meant to contribute to the FRFIs’ operational and financial resilience and help safeguard their reputation. The first five were included in Draft Guideline B-10, with only minor wording differences in Revised Guideline B-10, whereas the sixth was added to Revised Guideline B-10.

  1. Governance and accountability structures are clear with comprehensive risk management strategies and frameworks in place.
  2. Risks posed by third parties are identified and assessed.
  3. Risks posed by third parties are managed and mitigated within the FRFI’s risk appetite framework.
  4. Third-party performance is monitored and assessed, and risks and incidents are proactively addressed.
  5. The FRFI’s third-party risk management program allows the FRFI to identify and manage a range of third-party relationships on an ongoing basis.
  6. Technology and cyber operations carried out by third parties are transparent, reliable and secure.

The following are the 11 principles that form the basis of Revised Guideline B-10. These have not changed significantly between Draft Guideline B-10 and Revised Guideline B-10:

  1. The FRFI is ultimately accountable for managing the risks arising from all types of third-party arrangements.
  2. The FRFI should establish a third-party risk management framework that sets out clear accountabilities, responsibilities, policies, and processes for identifying, managing, mitigating, monitoring, and reporting risks relating to the use of third parties.
  3. The FRFI should identify and assess the risks of a third-party arrangement before entering into the arrangement and periodically thereafter. Risk assessments should be proportionate to the criticality of an arrangement. Specifically, the FRFI should conduct risk assessments to decide on third-party selection, (re)assess the risk and criticality of the arrangement, and plan for adequate risk mitigation and oversight.
  4. The FRFI should undertake due diligence before entering contracts or other forms of arrangement with a third party, and on an ongoing basis proportionate to the level of risk and criticality of the arrangement.
  5. The FRFI is responsible for identifying, monitoring and managing risk arising from subcontracting arrangements undertaken by its third parties.
  6. The FRFI should enter into written arrangements that set out the rights and responsibilities of each party.
  7. Throughout the third-party arrangement, the FRFI and third party should establish and maintain appropriate measures to protect the confidentiality, integrity and availability of records and data.
  8. The FRFI’s third-party arrangements should allow the FRFI timely access to accurate and comprehensive information to assist it in overseeing third-party performance and risks. The FRFI should also have the right to conduct or commission an independent audit of a third party.
  9. The FRFI’s agreement with the third party should encompass the ability to deliver operations through disruption, including the maintenance, testing, and activation of business continuity and disaster recovery plans. The FRFI should have contingency plans for its critical third-party arrangements.
  10. The FRFI should monitor its third-party arrangements to verify the third party’s ability to continue to meet its obligations and effectively manage risks.
  11. Both the FRFI and its third party should have documented processes in place to effectively identify, investigate, escalate, track and remediate incidents to maintain risk levels within the FRFI’s risk appetite.

These outcomes and principles do not, in our view, mark a significant change from the approach that many FRFIs take to third-party arrangements, but their inclusion in explicit terms may help focus FRFIs on key expectations.

Third-Party Risk Management Framework (TPRMF)

Most FRFIs likely have policies and procedures designed to address certain arrangements with third parties—outsourcings, auditors, etc. Many FRFIs, however, do not have those policies integrated into a comprehensive third-party risk management framework which is designed to evaluate, risk-rate, classify and manage all third-party relationships across the enterprise. This is what Revised Guideline B-10 requires.

The TPRMF should be developed to manage the entire lifecycle of third-party arrangements, from sourcing all the way to exit and transition-out. It is through the TPRMF that the FRFI will identify and assess; manage and mitigate; and monitor and report on third-party risk.

Among other things, this enterprise-wide approach will help FRFIs manage various forms of risk, including concentration risk, which can sometimes be difficult to assess and manage on a single-engagement-by-single-engagement basis.

Clarifications regarding subcontractors

OSFI has indicated that Revised Guideline B-10 addresses concerns raised during the consultation process about the difficulties in imposing B-10 requirements on fourth-party subcontractors by clarifying the responsibilities of FRFIs for managing the risks posed by subcontracting. Whereas Draft Guideline B-10 required FRFIs to assess whether the existence of material subcontracting might negatively impact their operational and financial resilience during disruption and whether this risk could outweigh the benefits of the arrangement, Revised Guideline B-10 is broader and requires the FRFI to assess risks arising from subcontractors that could impact the FRFI. Revised Guideline B-10 indicates that FRFIs should receive ongoing updates and reporting on a third party’s use of subcontractors and that the contractual provisions used to achieve this should be tailored to the level of risk and the criticality of services provided by the third party.

Clarifications regarding other guidelines

As part of the consultation process leading up to the publication of Revised Guideline B-10, OSFI has been more explicit in how FRFIs are meant to comply with Revised Guideline B-10 and other guidelines (such as the Technology and Cyber Security Incident Reporting Advisory, Guidelines B-13: Technology and Cyber Risk Management and E-21: Operational Risk Management). Perhaps not surprisingly, Revised Guideline B-10 is meant to be applied in a manner consistent with the other directives and in a manner that is meant to ensure that arrangements with third parties do not impede the FRFI’s ability to comply with other OSFI guidance.

Minimum contractual requirements

Revised Guideline B-10 includes expectations for what ought to be included within the agreement with the third party for high-risk and high-criticality arrangements, not necessarily all arrangements. Before the publication of Revised Guideline B-10, similar requirements would have been expected to be included in material outsourcing agreements, but now any type of third-party arrangement (for example, hardware supply, loan purchase and servicing agreements, co-branding arrangements) that is high-risk or high-criticality is expected to address the subject matter of the minimum contractual requirements.

When reviewing Revised Guideline B-10, we think it’s important to look beyond Annex 2, which sets out the minimum contractual requirements suggested by OSFI. Expectations for the content of agreements with third parties can be found in other areas of the guideline as well. We’ve prepared a comparison cheat sheet, which compares the existing Guideline B-10 contractual requirements to Revised Guideline B-10 requirements.

The main thematic difference is OSFI’s recognition that a one-size-fits-all approach is not the expectation.

Consistent with Revised Guideline B-10’s emphasis on a risk-based approach beyond the binary consideration of whether or not an engagement is a material outsourcing, Revised Guideline B-10 acknowledges that not all arrangements with third parties will include a customized contract or a written contract at all. Instead, Revised Guideline B-10 includes a section regarding “Special Arrangements” to address these circumstances. In lieu of contractual terms that support a typical material outsourcing, OSFI requires that the FRFI have a risk management program covering the relationship that is proportionate to the level of risk and criticality of the arrangement. Mitigating steps other than contractual rights are expressly encouraged.

A similar approach informs Revised Guideline B-10’s approach to audit rights, employing methods other than an onsite audit by FRFI or OSFI (such as independent reports provided by third parties) to achieve oversight. In our experience, this has at times been the process adopted by FRFIs with certain vendors, but the explicit recognition of the validity of these sorts of audit reports—and the decision not to include audit provisions within Annex 2—does mark a notable change in approach from OSFI.

To manage the risks associated with each third-party arrangement, OSFI expects that FRFIs structure their written agreement with third parties in a manner that allows them to meet the expectations set out in Revised Guideline B-10. The following table compares the new non-exhaustive minimum contractual requirements with the existing Guideline B-10.

Download a PDF version of this side-by-side comparison of the existing and revised B-10 Guidelines.

Existing and revised B-10 minimum contractual requirements

 

Conclusion

Revised Guideline B-10 is a true re-framing of Guideline B-10, and while it introduces significant changes to OSFI’s guidance on managing third-party arrangements, many FRFIs have already been employing the sort of broad risk-based approach proposed by OSFI in outsourcing and similar arrangements. The single biggest shift for most organizations will be broadening the analysis to other third-party arrangements that were not typically dealt with through the sourcing or procurement functions through the implementation of a comprehensive third-party risk management framework that manages the entire lifecycle of third-party arrangements.

FRFIs will want to carefully consider the policies and procedures they employ for managing third-party relationships by:

  • Conducting intake and proper due diligence for all potential third-party arrangements.
  • Performing a detailed and broad risk assessment.
  • Considering and including appropriate risk mitigation strategies and dealing with circumstances where the FRFI is not able to successfully negotiate all of the protections it desires within the written agreement with the third party.
  • Adhering to OSFI’s contracting requirements through negotiation.
  • Ensuring adequate management and oversight over third-party relationships throughout the duration of the third-party arrangements.

As part of this process, contract templates, intake processes, contract governance and relationship management procedures for areas of operation beyond the FRFI’s IT infrastructure and other areas that have been the focus of past outsourcings will likely need to be adapted to take OSFI’s revised requirements into account.