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UK regulators propose supervision measures for critical third parties

UK regulators propose supervision measures for critical third parties

A discussion paper from the Bank of England (BofE), Financial Conduct Authority (FCA), and Prudential Regulation Authority (PRA) proposes new standards for monitoring services provided by critical third parties (CTP) to strengthen operational resilience in the UK.

Under the Financial Services and Markets bill, which was proposed on Wednesday and is currently before Parliament, the BofE, FCA, and PRA will be granted statutory powers, including enforcement powers, to supervise CTP services in financial markets.

CTPs deliver services to financial institutions and financial market infrastructures (FMIs) which offer benefits such as scalability, cost-efficiency, and improved user experiences, however they can also harm consumers if disrupted. The move aims to reduce the risk to financial stability that arises if CTPs fail.

Jon Cunliffe, deputy governor for financial stability, stated: “Financial market infrastructure firms are becoming increasingly dependent on third-party technology providers for services that could impact the financial stability of the UK if they were to fail or experience disruption. The potential measures examined in this DP provide an initial, but important step for the Bank of England to manage these systemic risks (in coordination with the FCA).

"The DP also includes suggestions to improve coordination between the Bank/PRA and FCA, international financial regulators, and UK non-financial regulators, which is key given the cross-border and cross-sectoral nature of many CTPs and the services they provide.”

The measures will oversee the services provided by CTPs to financial firms and FMIs. The discussion paper set out potential measures around how supervisory bodies could use their powers:

1. to identify potentially harmful CTPs;
2. to require CTP services meet minimum resiliency standards; and,
3. provide a framework for testing the resilience of material services offered by CTPs to firms and FMIs.

Nikhil Rathi, chief executive of the FCA, observed: “In an increasingly digital world, financial businesses are more dependent on a small number of third-party providers. That can bring significant benefits, but also comes with resilience risk. We want an open discussion about how we should use new powers Parliament is giving us to oversee the services these third parties provide to the financial sector and reduce the risk of major disruption, which could cause harm to consumers and markets.”

The move aims to improve the state of the UK financial sector by creating consistency with operational resilience in financial institutions and FMI firms and improving market discipline through more power given to supervisory authorities.

The supervisory authorities, while recognising the benefits of CTPs, will lay out regulation to complement the current measures that FMIs have in place to mitigate risks.

Sam Woods, deputy governor of prudential regulation and CEO of the PRA, added: “It is vital that the firms we regulate can rely on services provided to them by third parties, particularly where those third parties have become critical parts of the system. Today's paper sets out our thinking on how we can ensure the right levels of resilience for those services - we would welcome views from anyone taking an interest in this area.”

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