Operational Resilience in the UK Financial Sector: A New Era of Oversight for Critical Third Parties

The financial sector's reliance on third-party services has grown exponentially. These external providers play an important roles in delivering essential services, from cloud computing to payment processing. However, with increased dependency comes heightened risk. A disruption or failure in these services could reverberate across the financial ecosystem, impacting millions of consumers and potentially destabilising the UK financial system.

In response, the Bank of England , the Prudential Regulation Authority (PRA), and the Financial Conduct Authority have introduced a comprehensive oversight framework aimed at managing these risks. The CTP Oversight Regime, formalised in Policy Statement PS16/24, represents a milestone in operational resilience, ensuring the UK financial system remains robust against systemic disruptions.

The Need for Oversight

The Financial Services and Markets Act 2023 empowered regulators to take decisive action in managing risks posed by critical third parties (CTPs). These entities are designated based on their potential to significantly impact financial stability through operational failures. Disruptions caused by cyber-attacks, power outages, or system failures could cascade through the financial system, undermining public confidence and economic stability.

The new regime doesn’t absolve financial firms of their responsibilities. Instead, it complements existing operational resilience and outsourcing rules. Firms must still ensure they manage risks effectively, but the oversight regime adds an essential layer of protection by directly regulating the resilience of CTPs.

Key Features of the CTP Oversight Regime

The framework introduces a range of stringent requirements aimed at enhancing the resilience of CTPs:

Governance and Accountability

CTPs must establish governance structures that provide clear accountability. They are required to appoint a central point of contact with sufficient authority and knowledge to interface with regulators. This individual ensures the CTP adheres to all relevant rules and expectations.

Operational Risk Management

CTPs must implement comprehensive risk management frameworks. These include robust systems for identifying, assessing, and mitigating risks associated with their services. Special focus is placed on managing supply chain risks to prevent vulnerabilities from cascading through interconnected networks.

Cyber and Technology Resilience

Recognising the increasing frequency of cyber threats, CTPs are mandated to demonstrate strong cyber resilience. This involves securing their IT infrastructure, conducting regular penetration tests, and ensuring rapid response capabilities to address breaches or vulnerabilities.

Incident Management and Reporting

In the event of a disruption, CTPs are required to notify both regulators and their client firms promptly. The incident reporting framework includes initial, intermediate, and final reports detailing the nature of the incident, its impact, and the mitigation steps taken.

Scenario Testing

To ensure preparedness, CTPs must conduct regular scenario testing. These tests simulate severe but plausible disruption events to assess the resilience of their critical services. Results must be shared with regulators to demonstrate ongoing compliance and readiness.

Mapping and Dependency Analysis

CTPs must thoroughly map their service dependencies, identifying critical points of failure within their own operations and across their supply chains. This mapping exercise enables them to understand and mitigate risks more effectively.

Termination Planning

Service continuity is a priority even in cases where a CTP ceases operations or terminates its service agreements. CTPs are required to develop robust plans to ensure an orderly wind-down or transition of services without disrupting the financial system.

Self-Assessment and Continuous Improvement

CTPs are obligated to conduct regular self-assessments of their operational resilience. These assessments are submitted to regulators to ensure continuous compliance and to identify areas for improvement.

Proportionality and International Alignment

The regulators have adopted a proportionate approach, tailoring requirements to the systemic importance of the services provided by each CTP. The regime aligns closely with international standards, including the EU’s Digital Operational Resilience Act (DORA) and the Basel Committee’s Principles for Operational Resilience. This alignment ensures consistency and interoperability, particularly for global firms operating across multiple jurisdictions.

Implementation Timeline and Next Steps

The rules for CTPs will come into force on January 1, 2025. Once a third party is designated as a CTP by HM Treasury, these rules will apply immediately. However, certain requirements come with transitional periods to allow for a phased implementation. Regulators will actively engage with designated CTPs during this initial phase to ensure compliance and address any challenges.

Building a Resilient Future

The CTP Oversight Regime is a forward-looking framework designed to protect the UK financial system from the evolving risks associated with third-party dependencies. It emphasises the importance of a collaborative approach, where financial firms, third-party providers, and regulators work together to enhance resilience.

As the financial landscape evolves, operational resilience will remain a cornerstone of trust and confidence. This framework not only enhances systemic resilience but also sets a benchmark for global financial stability practices.

What are your thoughts on this new regime? How prepared is your organisation to adapt to these changes? Share your insights and join the conversation. Together, we can build a more resilient financial future.