Authors
Wendes Keung
On April 27, the Office of the Superintendent of Financial Institutions (OSFI) released a draft of its proposed major update to Guideline B-10, Outsourcing of Business Activities, Functions and Processes, and began a consultation process. This is the first major update to B-10 since 2009 and reflects a significant change in approach to regulating third-party risk management for federally regulated financial institutions (FRFIs).
Download a side-by-side comparison of the current and revised B-10 Guidelines, or see below for the same table on this page.
As noted above, Revised B-10’s approach is focused on outcomes and principles.
Revised B-10 presents five expected outcomes for FRFIs, which are meant to contribute to the FRFI’s operational and financial resilience and help safeguard its reputation3:
The following are the 11 principles that form the basis of the Revised B-104:
These outcomes and principle do not, in our view, mark a significant change from the approach that most FRFIs take to third-party arrangements, but their inclusion in explicit terms may be helpful for focusing FRFIs on key expectations.
Similar to the current form of B-10, Revised B-10 includes a number of expectations for what ought to be included within the agreement with the third party but most of the changes are relatively subtle, new syntax notwithstanding. We’ve prepared a cheat sheet, available here.
The main thematic difference related to contract requirements is OSFI’s recognition that a one-size-fits-all approach is not the expectation.
Consistent with Revised B-10’s emphasis on a risk-based approach beyond the binary consideration of whether or not an engagement is a material outsourcing, Revised B-10 acknowledges that not all arrangements with third parties will include a customized contract. Instead, Revised B-10 includes a section regarding “Standardized Contracts/Special Arrangements” to address these circumstances. In lieu of contractual terms that support a typical material outsourcing, OSFI’s requirement is 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 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 the annex of Minimum Provisions for Third-Party Agreements—does mark a notable change in approach from OSFI.
As OSFI receives comments on Revised B-10, it may be that additional changes to the contractual requirements will be incorporated, but in the present draft many of the changes are quite subtle.
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 the Revised Guideline B-10. The following table compares the new non-exhaustive minimum contractual requirements with the current Guideline B-10.
Download a PDF version of this side-by-side comparison of the current and revised B-10 Guidelines.
Guideline B-105 |
Revised Guideline B-106 |
Nature and scope of the arrangement |
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The agreement is expected to specify the scope of the relationship, which may include provisions that address the frequency, content, and format of the service being provided. The agreement is expected to detail the physical location where the service provider will provide the service. |
The agreement should specify the nature and scope of the arrangement, including provisions that address the frequency, content and format of services, duration of the agreement, and physical location of the services being provided. |
Roles and responsibilities |
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Not included as a separate contractual requirement. |
The agreement should clearly establish the roles and responsibilities of the FRFI and the third party and any material subcontractors of the third party, including the management of technology and cyber risks and controls. |
Use of subcontractors |
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The agreement is expected to set out any rules or limitations to subcontracting by the service provider. Security and confidentiality standards should apply to subcontracting or outsourcing arrangements by the primary service provider. |
The agreement should establish parameters on the use of subcontractors and require the third party to notify the FRFI of any subcontracting of services so that the FRFI may conduct due diligence, as well as assess and manage the risk of the subcontractors and any potential impacts from a change in service. |
Pricing |
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The agreement should fully describe the basis for calculating fees and compensation relating to the service being provided. |
The agreement should set out the basis for calculating fees relating to the services being provided. |
Performance measures |
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Performance measures should be established that allow each party to determine whether the commitments contained in the contract are being fulfilled. |
The agreement should establish performance measures that allow each party to determine whether the commitments set out in the agreement are being fulfilled. |
Ownership and access |
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Identification and ownership of all assets (intellectual and physical) related to the outsourcing arrangement should be clearly established, including assets generated or purchased pursuant to the outsourcing arrangement. The agreement should state whether and how the service provider has the right to use the FRFI’s assets (e.g., data, hardware and software, system documentation, or intellectual property) and the FRFI’s right of access to those assets. |
The agreement should identify and establish ownership of all assets (intellectual and physical) related to third-party arrangements, including assets generated or purchased pursuant to the arrangement. The agreement should also specify whether and how the third party has the right to use the FRFI’s assets (e.g., data, hardware and software, system documentation, or intellectual property), including authorized users, and the FRFI’s right of access to those assets. |
Security of records and data |
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At a minimum, the agreement is expected to set out the FRFI’s requirements for confidentiality and security. Ideally, the security and confidentiality policies adopted by the service provider would be commensurate with those of the FRFI and should meet a reasonable standard in the circumstances. The agreement should address which party has responsibility for protection mechanisms, the scope of the information to be protected, the powers of each party to change security procedures and requirements, which party may be liable for any losses that might result from a security breach, and notification requirements if there is a breach of security. |
The agreements should govern the confidentiality, integrity, security, and availability of records and data. |
Guideline B-10 |
Revised Guideline B-10 |
Notifications to the FRFI |
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Not included as a separate contractual requirement. |
The agreement should require the third party to notify the FRFI of:
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Dispute resolution |
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OSFI expects the agreement to incorporate a protocol for resolving disputes. The agreement should specify whether the service provider must continue providing the service during a dispute and the resolution period, as well as the jurisdiction and rules under which the dispute will be settled. |
The agreement should incorporate a protocol for resolving disputes. The agreement should also specify whether the third party must continue providing the service during a dispute and the resolution period, as well as the jurisdiction, governing law(s), and rules under which the dispute will be settled. |
Regulatory compliance |
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Not included as a separate contractual requirement. |
The agreement should enable the FRFI to comply with all applicable legislative and regulatory requirements, including, but not limited to, location of records and privacy of client information. |
Business continuity and recovery |
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The agreement should outline the service provider’s measures for ensuring the continuation of the outsourced business activity in the event of problems and events that may affect the service provider’s operation, including systems breakdown and natural disasters, and other reasonably foreseeable events. The FRFI should ensure that the service provider regularly tests its business recovery system as it pertains to the outsourced activity, notifies the FRFI of the test results, and addresses any material deficiencies. The FRFI is expected to provide a summary of the test results to OSFI upon reasonable notice. In addition, the FRFI should be notified in the event that the service provider makes significant changes to its business resumption and contingency plans, or encounters other circumstances that might have a serious impact on the service. |
The agreement should require the third party to outline measures for ensuring continuity of services in the event of disruption, including testing and reporting expectations and mitigation requirements, as well as requirements of the third party to monitor and manage technology and cyber security risk. |
Default and termination |
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The agreement is expected to specify what constitutes a default, identify remedies, and allow for opportunities to cure defaults or terminate the agreement. The FRFI is expected to ensure that it can reasonably continue to process information and sustain operations in the event that the outsourcing arrangement is terminated or the service provider is unable to supply the service. Appropriate notice should be required for termination of service and the FRFI’s assets should be returned in a timely fashion. In particular, data and records relating to data processing outsourcing arrangements should be returned to the FRFI in a format that would allow the FRFI to sustain business operations without prohibitive expense. |
The agreement should specify what constitutes a default, or right to terminate, identify remedies, and allow for opportunities to cure defaults or terminate the agreement. Appropriate notice should be required for termination of the service and, where applicable, the FRFI’s assets should be returned in a timely fashion. Any data and records should be returned to the FRFI in a format that allows the FRFI to sustain business operations without unreasonable expense. |
Insurance |
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The service provider should be required to notify the FRFI about significant changes in insurance coverage and disclose the general terms and conditions of the insurance coverage. |
The agreement should require the third party to obtain and maintain appropriate insurance and disclose the general terms and conditions of the insurance coverage. The agreement should also require the third party to notify the FRFI in the event of significant changes in insurance coverage. |
Prudent risk management |
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Not included as a separate contractual requirement. |
The agreement should include any additional provisions necessary for the FRFI to prudently manage its risks in compliance with the Revised Guideline B-10. |
Revised B-10 is a true re-framing of the B-10 guideline 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.
Nevertheless, as Revised B-10 continues to develop, FRFIs will want to carefully consider the policies and procedures they employ for managing third-party relationships:
As part of this process, contract templates, intake processes, and 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 requirements into account.
As noted above, Revised B-10 is currently in the consultation stage. OSFI seeks feedback and comment (especially on the clarity and granularity of detail of OSFI’s risk management expectations) by July 27, 2022 to [email protected].
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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