How to handle third-party risk management and comply with CPS 230

As financial institutions strive to maintain operational integrity and safeguard sensitive data in line with the incoming CPS 230 regulations, understanding third-party risk management has never been more critical. Let’s explore the fundamentals of third-party risk management and how it relates to the upcoming CPS 230 regulations.

What are the incoming CPS 230 regulations?

CPS 230, issued by the Australian Prudential Regulation Authority (APRA), sets out prudential requirements for managing information security risks in financial institutions. The regulations aim to enhance the resilience of APRA-regulated entities against cyber threats and ensure the integrity and confidentiality of customer information.

The impact of CPS 230 on financial institutions and compliance efforts is significant. It requires institutions to strengthen their risk management processes, enhance their cybersecurity measures, and establish clear accountability and governance frameworks to manage information security risks effectively.

Defining third-party risk management

Third-party risk management involves assessing and mitigating the potential risks associated with outsourcing certain functions, services, or processes to external parties. In the context of financial institutions, third parties can include vendors, suppliers, contractors, service providers, and other external entities that have access to sensitive data or perform critical functions on behalf of the institution.

Financial institutions rely on third-party relationships to enhance efficiency, reduce costs, and access specialised expertise. The new standards do not mean that APRA-regulated entities should stop working with third parties; they simply mean that the relationships must be better managed and more closely watched. These relationships can introduce inherent risks, including cybersecurity threats, compliance failures, operational disruptions, and reputational damage. Still, they are essential to the industry's supply chain. With structured vendor management within these systems, entities can limit operational risks.

Third-party risk management: assessment and mitigation

Conducting comprehensive assessments to identify and evaluate potential risks associated with third-party relationships is essential. This process involves assessing the nature of services provided, access to sensitive data, geographic location, financial stability, and regulatory compliance.

Financial institutions should consider building assessment teams and frameworks for their relationships with material service providers and other third-party suppliers. By using technology and structure to build go-to methods for compliance, APRA-regulated entities can easily handle the pressure of CPS 230 and better understand their risk profile.

This should include implementing strategies and controls to mitigate identified risks and threats when they arise and strengthening the security posture of third-party relationships. Compliance is a team sport, and providers and suppliers should play a role. This may include contractual agreements, due diligence processes, monitoring mechanisms, and ongoing oversight activities.

The intersection of third-party risk management and CPS 230

In light of CPS 230, financial institutions must adopt robust strategies for assessing and mitigating third-party risks. Here are the most essential elements of best practice for third-party management:

Vendor risk assessment

Conduct thorough due diligence and risk assessments before engaging third-party vendors. Assess their security posture, regulatory compliance, and ability to safeguard sensitive data. This should apply to new and existing arrangements. 

Contractual agreements

Establish clear contractual agreements outlining both parties' responsibilities, obligations, and expectations regarding information security and data protection. Include provisions for regular audits, monitoring, and incident response procedures.

Ongoing monitoring

Regularly review vendor performance, security controls, and compliance with contractual obligations. Stay vigilant for any indicators of potential risk or non-compliance.

Risk mitigation

Develop strategies to mitigate identified risks and vulnerabilities associated with third-party relationships. This may involve implementing additional security measures, conducting regular security assessments, and implementing contingency plans to respond to potential breaches or disruptions.

Third-party risk management programs lead to compliance

By integrating third-party risk management practices into their overall risk management strategy, financial institutions can enhance their resilience against cyber threats, safeguard customer information, and maintain compliance with CPS 230 and other industry standards. Effective third-party risk management is not only essential for protecting the interests of financial institutions but also for maintaining trust and confidence among customers and stakeholders.

For more on how automated solutions and AI can help your institution comply with new regulations, check out our APRA CPS 230 hub, or get in touch with us for a personalized demo.