Third-Party Risk Management Regulations: How To Avoid Risk

Are you unsure which third-party risk management regulations you must follow to avoid risk? In today’s competitive business landscape, most companies must collaborate with many third-party partners, vendors, and suppliers to keep operations running smoothly and strengthen their bottom line. However, these third parties also create risks that can harm the organization’s operations, financial standing, and reputation.

That’s why it’s crucial to have a proper vendor management program in place and rely on risk management best practices to minimize these risks. It’s also essential to consider third-party risk management regulations and standards and ensure your third parties comply. This article will explore these regulations and their benefits.

Third-Party Risk Management Regulations For Decision-Making

A good understanding of third-party risk management regulations is essential for protecting companies from different types of vendor risk. It can help decision-makers make fully informed choices for the company’s welfare and appropriately assess, measure, monitor, and control the risks associated with any third-party relationship. The fundamental step in the third-party risk management process is a risk assessment that helps develop a thorough understanding of whether or not to enter into a third-party relationship.

Different risk management regulations help organizations manage and mitigate third-party risks. Studying these rules and regulations is essential to avoid problems down the road.

Cybersecurity and Data Protection Regulations

Several rules and regulations focus on cybersecurity and data protection, assuring businesses that they have the complete security of the law. It’s essential to ensure that third-party vendors maintain their customers’ data privacy at all costs. There must be a robust information disclosure and security protocol in place.

In Europe, there is a comprehensive consumer protection law to protect the personal information of EU citizens and residents, the General Data Protection Regulation (GDPR). It standardizes data protection law across all 28 EU countries and imposes strict rules on controlling and processing personally identifiable information (PII). The law applies to any organization within or outside the EU that processes the personal data of EU citizens or residents. The GDPR requires organizations to perform regular risk assessments to improve cybersecurity and prevent attacks or breaches that could cause havoc if left unchecked.

US Data Privacy Laws

In the US, there is no centralized federal-level law, but there are vertically-focused US data privacy laws, including the following:

  • The US Privacy Act of 1974 states that government agencies have rights and restrictions on data.
  • Health Insurance Portability and Accountability Act (HIPAA) incorporates provisions for guarding the security and privacy of personal health information.
  • Gramm-Leach-Bliley Act of 1999 includes provisions to protect consumers’ personal financial information held by financial institutions.
  • Children’s Online Privacy Protection Act (COPPA) took effect in 2000. It applies to the online collection of personal information from children under 13. Monitored by the Federal Trade Commission (FTC), the rules limit how companies may collect and disclose children’s personal information.

There are also specific laws at the state level that attend to data protection and cybersecurity. One of the most prominent is the California Consumer Privacy Act (CCPA) of 2018. This law is similar to the European Union’s GDPR. The CCPA seeks to protect the rights of people regarding their data and imposes obligations on companies that do business in California to help support those rights. This includes third parties who work with data. Additionally, ISO/IEC 27001:2013 is an information security management system (ISMS) specification. It applies to controls related to information security in third-party relationships and supplier service delivery management.

FED SR 13-19 Guidance on Managing Outsourcing Risk

The Federal Reserve issued this guidance in 2013 to help financial institutions, financial services providers, and banking organizations develop a secure third-party risk management program. The guidance applies to all service provider relationships regardless of the type of outsourced bank activity.

Similar to FED SR 13-19, the FIL-44-2008 published by the Federal Deposit Insurance Corporation (FDIC) also addresses the risks that may arise from financial institutions’ third-party relationships. It outlines some key risks that can arise from third-party relationships, the principles of risk oversight, risk management, vendor contract negotiation and structures, and vendor oversight.

Sarbanes-Oxley Act (SOX)

This law is designed to protect investors and the public by increasing the accuracy and reliability of corporate disclosures. It applies to all public companies operating in the US. SOX defines internal audit requirements, the records businesses should store, and how long they should be. It includes several controls for managing third-party risk.

In addition to the abovementioned regulations, many other regulations and laws are related to third-party risk management. Companies should refer to relevant third-party risk management regulations when accomplishing all steps of vendor risk management. Third-party risk management is a complicated and arduous process. And although each third-party-risk management program is different, there are some areas in the third-party risk management lifecycle where automation makes sense.

Benefits of Third-Party Risk Management Regulations

Third-party risk management regulations, laws, and standards provide frameworks, policies, and resources to help companies manage third-party risk and develop contingency plans. They also guide the controls and procedures that organizations must implement to ensure vendor risk mitigation and, if possible, elimination of third-party risk.

By complying with regulators and laws, businesses can prove their willingness to go the extra mile to earn trust and establish a reputation for ethical business practices and reliability.

Compliance with applicable regulations and standards can also help reduce the negative impact of any interruptions to third-party operations, maintain business continuity, and protect your company from data breaches, security incidents, and any resultant fines or other penalties.

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