European Central Bank raises warning on outsourcing risks
FRANKFURT, GERMANY — The European Central Bank (ECB) issued a stern warning to banks regarding the risks associated with outsourcing, emphasizing the need for better management, particularly in the handling of personal data.
In its supervisory priorities for 2024, the ECB highlighted the necessity for banks to mitigate risks arising from their growing reliance on external service providers. This includes addressing the complexities of supply chains and the dangers of over-reliance on a limited number of providers.
Banks increasingly rely on outsourcing, including from providers based outside the EU.
To ensure they can operate smoothly and remain resilient, banks need to improve management of their outsourcing risks.Read more https://t.co/ypwFNbmlTQ pic.twitter.com/IHOxL0xnKG
— European Central Bank (@ecb) February 21, 2024
A recent ECB data review from 2023 revealed a significant increase in the number and budget of outsourcing agreements, with a notable focus on essential services. Despite a rise in providers within the European Union (EU), more than 30% of the outsourcing expenditure by major banks is allocated to just ten companies, predominantly located outside the EU.
The ECB’s scrutiny uncovered that over 10% of critical function contracts fail to meet regulatory standards. Alarmingly, 20% of these contracts have not been properly risk-assessed in the last three years, and 60% have not been audited.
The ECB has expressed concern that banks are not adequately addressing their outsourcing risks.
“Given these developments, it is essential that banks assess and manage their outsourcing risks appropriately to ensure that the system as a whole remains resilient,” the ECB stated.
The regulator has vowed to take action to ensure compliance with regulations among these institutions.
Last month, Germany’s financial regulator, the Federal Financial Supervisory Authority (BaFin), warned that market concentration in the outsourcing of IT services poses a rising threat.
