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In December 2024, the Bank of England's Prudential Regulation Authority (PRA) released CP17/24 – Operational Incident and Outsourcing and Third-Party Reporting, a consultation paper designed to enhance the operational resilience of PRA-regulated firms. Against the backdrop of increasing operational disruptions and cyber risks, CP17/24 strengthens operational resilience by introducing standardised reporting requirements and enhanced oversight mechanisms.
This initiative builds on the PRA's earlier CP16/24 on Critical Third Parties (CTPs) by broadening the focus to include all outsourcing and third-party relationships. Together, these two papers create a unified framework for mitigating systemic risks, with CP16/24 targeting critical service providers and CP17/24 addressing resilience across the entire third-party ecosystem. This dual approach establishes a feedback loop between financial institutions and critical providers, enabling more effective risk monitoring and fostering a culture of transparency and accountability across the ecosystem.
This article explores the objectives and implications of CP17/24 while highlighting its alignment with CP16/24, which we discussed in-depth in my previous article, Understanding the Bank of England’s New Policy PS16/24 on Critical Third Parties and Its Implications for the Financial Sector. By addressing both ends of the outsourcing relationship, the PRA aims to fortify the financial system’s ability to withstand disruptions and protect its interconnected networks of providers and clients.
TABLE OF CONTENTS
Scope and Objectives of CP17/24 on Operational Resilience
The Bank of England's Consultation Paper CP17/24 represents a proactive step in bolstering the operational resilience of PRA-regulated firms. By introducing enhanced oversight and reporting mechanisms, the proposals aim to ensure that disruptions—whether internal or stemming from third-party dependencies—are effectively managed to safeguard the broader financial system.
Incident Reporting: Setting Standards for Timely and Transparent Notification
Operational incidents can disrupt critical services, impairing market confidence and financial stability. To address this, CP17/24 proposes the establishment of clear thresholds and timelines for reporting incidents. This ensures a consistent approach across all PRA-regulated entities, allowing regulators to monitor, assess, and mitigate risks in real time.
Key aspects include:
Materiality Thresholds: Firms must report incidents that significantly impact their ability to deliver critical services, disrupt the market, or jeopardise client interests.
Notification Timelines: Severe incidents—such as cyberattacks or systemic IT failures—must be reported within 24 hours of identification. Lesser incidents may require reporting within predefined windows, fostering clarity and uniformity.
Standardised Templates: The PRA is likely to introduce standardised reporting formats, enabling firms to provide consistent and comparable information.
Third-Party Risk Management: Mitigating Dependency Risks
Modern financial institutions rely heavily on outsourcing and third-party services, ranging from cloud computing to payment processing. CP17/24 emphasises the importance of robust third-party risk management practices to address the growing complexity and dependencies in the financial sector.
Core requirements include:
Comprehensive Registers: Firms must maintain detailed registers of all outsourcing arrangements, outlining the nature of services provided, associated risks, and contingency plans.
Regular Assessments: Institutions are expected to assess third-party providers’ operational resilience through ongoing monitoring, stress testing, and due diligence reviews.
Contingency Plans: Firms must prepare and maintain robust contingency plans to ensure continuity in the event of third-party failures, including third party exit strategies and alternative provider arrangements.
Regulatory Insight: Strengthening Systemic Oversight
The regulator seeks to empower regulators with the tools and data needed to assess systemic risks more effectively. By mandating detailed reporting of operational incidents and third-party dependencies, the PRA aims to gain unprecedented visibility into the operational resilience landscape across the UK financial sector.
The proposed requirements will:
Facilitate Systemic Risk Assessment: By aggregating data from multiple firms, the PRA can identify trends, interdependencies, and vulnerabilities that may not be apparent at the individual firm level.
Enable Proactive Intervention: Timely and granular reporting will allow regulators to intervene earlier, minimising the potential impact of disruptions.
Support Policy Development: Insights derived from this reporting will guide future policy initiatives, ensuring they remain responsive to emerging risks.
CP17/24 aligns with global regulatory trends, such as the EU’s Digital Operational Resilience Act (DORA), reinforcing the UK’s commitment to maintaining financial stability in an interconnected global economy.
Firms in Scope
CP17/24 is directed at PRA-regulated firms, which include:
Banks: Institutions providing essential financial services, such as lending and payment processing.
Insurers: Providers of life, property, and casualty insurance, which are critical to financial stability and risk mitigation.
Investment Firms: Entities managing client assets and providing advisory services, whose operations often depend on seamless access to third-party systems and data.
These firms are expected to manage operational risks through both internal frameworks and external partnerships, ensuring resilience across all levels of their operations. This dual responsibility underscores the need for robust governance structures and a strategic approach to managing outsourcing arrangements.
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Proposed Reporting Framework
The consultation paper introduces key measures to address systemic vulnerabilities and sets the stage for enhanced reporting and governance mechanisms across the UK financial sector. The three primary objectives are detailed below.
Incident Reporting: Timely and Standardised Notification
Operational incidents, whether due to internal failures or external shocks, can ripple through the financial system, disrupting services and eroding consumer trust. CP17/24 seeks to standardise how firms identify, report, and respond to such incidents, ensuring a uniform approach across the industry.
Key proposals include:
Clear Reporting Thresholds: Firms will need to classify incidents based on their severity, focusing on:
Disruptions that impede critical operations.
Events that impact financial stability or consumer confidence.
Incidents with the potential to disrupt market integrity.
Defined Notification Timelines: Severe incidents, such as a cyberattack or critical IT failure, must be reported within 24 hours of detection. This urgency ensures that regulators can assess and intervene in a timely manner.
Consistent Reporting Formats: The PRA aims to introduce a standardised template for reporting operational incidents. This approach will allow for more efficient data aggregation and systemic risk analysis.
For example, a severe IT failure at a major bank affecting payment processing systems would require immediate assessment and reporting under the proposed 24-hour notification window. By using standardised templates, the firm would ensure timely escalation to regulators, enabling coordinated intervention to mitigate potential ripple effects across the financial sector.
Third-Party Risk Management: Mitigating Systemic Dependencies
Outsourcing has become an integral part of financial services operations, with firms relying heavily on third-party providers for IT infrastructure, data processing, cloud computing, and payment systems. While these partnerships offer efficiency, they also create vulnerabilities if not adequately managed. CP17/24 addresses these risks by requiring firms to adopt comprehensive third-party risk management practices.
Proposed requirements include:
Comprehensive Outsourcing Registers: Firms must maintain a detailed inventory of their outsourcing and third-party arrangements. This register should include:
The nature and scope of services provided.
Associated risks and criticality assessments.
Contingency plans and service continuity measures.
Risk Assessments: Firms are expected to assess their third-party providers' operational resilience capabilities. This includes evaluating vendors' business continuity plans, security protocols, and ability to recover from disruptions.
Ongoing Monitoring and Due Diligence: Continuous oversight of third-party performance will be mandatory. This involves:
Monitoring compliance with service-level agreements (SLAs).
Conducting periodic stress testing and resilience assessments.
Contingency Planning: Firms must develop and document contingency strategies for managing third-party failures. These plans should include clear escalation procedures, alternative arrangements, and recovery timelines.
Regulatory Insight: Enhancing Systemic Oversight
To effectively monitor and mitigate systemic risks, regulators require comprehensive and timely data on operational incidents and third-party dependencies. CP17/24 proposes measures to enable the PRA to gain deeper insights into the resilience of the UK financial sector.
Key initiatives include:
Granular Data Collection: Standardised incident and outsourcing reports will provide the PRA with consistent, detailed information across firms. This data will help regulators identify common vulnerabilities and potential systemic risks.
Proactive Risk Identification: With access to real-time incident data, the PRA can anticipate and address emerging threats before they escalate into broader crises.
Improved Policy Development: Insights derived from incident and third-party reports will inform future regulatory policies, ensuring they remain aligned with the evolving risk landscape.
Outsourcing and Third-Party Relationships: Operational Efficiency vs. Vulnerability
The PRA’s CP17/24 introduces significant regulatory requirements that reshape how financial institutions and their third-party providers manage operational resilience. These changes will have operational, financial, and relational impacts across the ecosystem.
Operational and Financial Impacts on Firms
The PRA’s CP17/24 introduces significant regulatory requirements that will reshape the financial industry's landscape. Firms must:
Invest Strategically in Technology: Allocate capital for advanced systems that enable real-time monitoring and reporting.
Enhance Governance Structures: Reevaluate and strengthen governance frameworks to meet heightened regulatory expectations.
Reassess Outsourcing Practices: Strategically consider consolidating third-party providers or diversifying to mitigate risks.
Manage Increased Compliance Costs: Budget for higher operational expenses due to compliance efforts, potentially affecting profitability.
Smaller firms may experience more significant impacts due to limited resources, potentially leading to market consolidation.
Sectoral Impacts
The sector-wide adoption of CP17/24 will drive several key changes:
Increased Costs for Providers: For smaller FinTechs, compliance costs may disproportionately affect their operational budgets, potentially limiting innovation or leading to consolidation. Conversely, established cloud providers may face heightened scrutiny but benefit from their ability to invest in meeting resilience standards, solidifying their market position.
Market Consolidation: Smaller providers may struggle to meet the new requirements, potentially leading to a reduction in viable third-party options and a shift toward larger, better-resourced providers.
Greater Collaboration: Firms and their providers must work together on joint testing, contingency planning, and aligning resilience strategies, fostering stronger partnerships.
Changes in Third-Party Relationships
The CP17/24 requirements impose stricter standards for third-party relationships:
Heightened Scrutiny: Financial institutions must conduct rigorous assessments of providers’ resilience capabilities, including scenario testing and incident response protocols.
Revised Contracts: Contracts must include resilience requirements, clear escalation protocols, and contingency plans for seamless service continuity in case of provider failure.
Shift in Provider Landscape: Smaller providers may exit the market, while larger, more capable vendors assume dominant roles.
The combined frameworks of CP16/24 and CP17/24 create a feedback loop between financial institutions and critical providers. While CP16/24 mandates CTPs to meet stringent resilience standards, CP17/24 holds regulated firms accountable for managing third-party risks comprehensively. This interplay enhances systemic visibility and ensures proactive mitigation of potential vulnerabilities.
Strategic Considerations for Financial Firms
To navigate these changes effectively, financial institutions should adopt a strategic approach to third-party management:
Risk-Based Prioritisation: Focus resources on providers that deliver critical services, conducting in-depth assessments of their resilience frameworks.
Proactive Engagement: Work closely with providers to align resilience strategies, share expectations, and foster transparency.
Cost-Benefit Analysis: Evaluate the trade-offs between outsourcing efficiency and the resilience-related costs of compliance.
Scenario Planning: Regularly test the organisation’s ability to respond to third-party disruptions, integrating these exercises into broader business continuity planning.
Impact on SMCR and SMF24
The CP17/24 consultation paper has significant implications for the Senior Managers and Certification Regime (SMCR), particularly for the SMF24: Chief Operations Function, who is responsible for overseeing operational resilience and third-party risk management. The paper increases the accountability of senior managers by introducing stricter requirements for incident reporting, third-party oversight, and governance.
Key Implications for SMF24
Operational Resilience Leadership: SMF24 must lead the implementation of frameworks to meet resilience standards, ensuring timely incident reporting, cross-departmental coordination, and effective oversight of third-party risks.
Third-Party Oversight: Accountability includes maintaining detailed outsourcing registers, conducting vendor resilience testing, and ensuring robust contingency plans for third-party failures.
Regulatory Engagement: SMF24 will serve as the key point of accountability for responding to PRA inquiries and providing evidence of compliance with CP17/24.
For instance, in the event of a critical vendor outage disrupting payment services, the SMF24 would need to coordinate internal response teams, oversee incident reporting within the 24-hour window, and ensure compliance with third-party oversight protocols. Failure to demonstrate effective leadership could result in regulatory penalties and reputational damage.
Broader SMCR Implications
Other senior managers, such as SMF1 (Chief Executive) and SMF4 (Chief Risk Function), share accountability for ensuring firm-wide compliance and integrating operational resilience into the overall risk management framework.
The Certification Regime requires individuals managing third-party risks or incident reporting to demonstrate sufficient expertise, while Conduct Rules enforce diligence and integrity in implementing these requirements.
Key Compliance Challenges
Implementing CP17/24's requirements presents several practical challenges for firms:
Defining Reporting Thresholds: Determining what constitutes a reportable incident requires careful analysis to balance regulatory compliance with operational efficiency.
Timely Data Collection and Reporting: Establishing processes that enable quick and accurate data gathering across departments is complex and may require process reengineering.
Cross-Functional Coordination: Ensuring seamless collaboration between IT, compliance, risk, and operations teams is critical but often hindered by siloed structures.
Maintaining Comprehensive Third-Party Registers: Tracking all outsourcing arrangements demands meticulous record-keeping and regular updates.
Conducting Resilience Testing with Vendors: Coordinating testing schedules and methodologies with multiple vendors poses logistical challenges.
Updating Contracts and SLAs: Renegotiating terms to include new compliance requirements can be time-consuming and may face resistance from vendors.
Resource Allocation for Expertise: Developing or acquiring the necessary expertise in operational resilience and compliance is essential but challenging, especially under tight timelines.
Strategies for Addressing Compliance Challenges
To overcome these hurdles, firms should consider adopting proactive strategies, such as:
Investing in Technology and Automation
Implement tools and platforms that streamline incident reporting, vendor management, and resilience testing. Automation can reduce the burden on human resources while improving accuracy and speed.
Fostering Cross-Functional Collaboration
Establish clear governance structures and communication channels to ensure seamless coordination across departments during disruptions.
Prioritising High-Risk Vendors
Focus efforts on critical third-party relationships that pose the greatest risk to operations. This allows firms to allocate resources efficiently while addressing the most significant vulnerabilities.
Engaging External Expertise
For smaller firms or those with limited in-house expertise, partnering with external consultants or outsourcing compliance functions can provide a cost-effective solution.
Conducting Regular Training and Drills
Ensure that all relevant teams are familiar with incident reporting protocols, third-party oversight requirements, and resilience strategies. Regular training can help build a compliance-oriented culture.
Conclusion and Resources
CP17/24 represents a proactive approach to safeguarding the UK financial sector against operational disruptions. By fostering a culture of transparency, accountability, and resilience, the PRA aims to reinforce systemic stability.
Firms must act now to evaluate their readiness and engage with stakeholders to implement the proposed changes. For tailored support in navigating these requirements, contact Aevitium LTD for expert guidance in operational resilience and regulatory compliance.
Firms that proactively align with CP17/24 will not only mitigate regulatory risks but also position themselves as leaders in operational resilience, fostering trust among clients and stakeholders. As global regulatory frameworks converge, early adoption can provide a competitive edge in a rapidly evolving financial landscape.
Frequently Asked Questions
1. What is the primary focus of CP17/24?CP17/24 aims to enhance operational resilience by introducing standardised reporting for incidents and outsourcing arrangements.
2. How will these proposals affect third-party providers?Third parties will face increased scrutiny, requiring them to demonstrate robust resilience and compliance frameworks.
3. What are the reporting thresholds for operational incidents?The PRA proposes reporting incidents based on materiality, with severe disruptions requiring notification within 24 hours.
4. How can firms prepare for these changes?Firms should assess their current frameworks, invest in resilience tools, and engage with third parties to align processes with the PRA’s requirements.
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