Three of the UK’s supervisory banking authorities have set out new measures to strengthen the resilience of services provided by critical third parties (CTPs) to the financial sector.

CTPs provide services to regulated financial services firms that could affect financial stability and cause harm to consumers if they fail or are disrupted.

The potential measures, included in a new discussion paper from the Bank of England (BoE), the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), aim to mitigate this risk.

The discussion paper has set out potential measures for how the three authorities could use their proposed powers, and include a framework for identifying potential CTPs which would inform the supervisory authorities’ recommendations for formal designation by the Treasury. 

Other measures include implementing minimum resilience standards, which would apply to the services that designated CTPs provide to firms, as well as a framework for testing the resilience of material services that CTPs provide to firms – including but not limited to scenario testing, participation in sector-wide exercises, cyber resilience testing, and skilled persons reviews of CTPs.

The FCA stated that these measures would complement firms’ existing responsibilities to manage risks from contracts with third parties.

“It is vital that the firms we regulate can rely on services provided to them by third parties, particularly where those third parties have become critical parts of the system,” said deputy governor of prudential regulation and CEO of the PRA, Sam Woods.

“Today’s paper sets out our thinking on how we can ensure the right levels of resilience for those services – we would welcome views from anyone taking an interest in this area.”

FCA chief executive, Nikhil Rathi, added: “In an increasingly digital world, financial businesses are more dependent on a small number of third-party providers. That can bring significant benefits, but also comes with resilience risk.

“We want an open discussion about how we should use new powers Parliament is giving us to oversee the services these third parties provide to the financial sector and reduce the risk of major disruption, which could cause harm to consumers and markets.”

Subject to the outcome of Parliamentary debates on the Financial Services and Market Bill, the three authorities plan to consult on their proposed requirements and expectations for CTPs in 2023.

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