Navigating CPS 230: A Comprehensive Guide for Financial Services Risk Managers

The new CPS 230 regulations issued by the Australian Prudential Regulation Authority (APRA) are just the latest shift in the rapidly evolving financial operational landscape. Regulatory compliance is paramount for ensuring the stability and integrity of financial institutions, and the changes focus on the operational and security risks posed by outsourcing arrangements for financial institutions.

The changes introduced by APRA are largely focused on best practices for operational risk management, especially in terms of outsourcing. In this blog and a series of other posts, we’ll look at how these changes will affect the workflow of financial institutions and what steps need to be taken to comply. While they may appear complicated at first glance, the prudential standard CPS 230 changes can be followed quite easily if you have the right approach and tools.

So, let's delve into the intricacies of the changes for regulated entities, and what actionable strategies you should follow to achieve compliance.

Understanding CPS 230

Also known as the Prudential Standard on Outsourcing, CPS 230 will replace a number of old regulations that charter the requirements for APRA-regulated institutions. The new regulations, which come into effect on 1 July 2025, are set out to ensure that outsourcing activities do not compromise institution's ability to meet their prudential obligations and avoid security risk incidents. 

To comply with CPS 230, APRA expects institutions to identify, assess, and manage the risks associated with outsourcing arrangements. APRA-regulated entities must maintain their critical operations to withstand severe disruptions, and these changes should give financial institutions the framework to avoid significant operational risks.

CPS 230 regulations will affect all APRA-regulated entities and their services, including: 

• Authorized deposit-taking institutions (ADIs)
  
• General insurers
• Life companies/insurers
• Private health insurers
• Registrable superannuation entity licensees

What CPS 230 Requires from Financial Institutions:

Identification and Assessment of Risks

• Understand the types of operational outsourcing arrangements that your institution has with material service providers
• Identify and assess the operational risk profile of outsourcing arrangements and their impact on the institution

Due Diligence in Selecting and Managing Third-Party Service Providers:

• Conduct thorough due diligence on prospective service providers
• Establish contractual agreements that clearly define responsibilities and obligations
• Implement mechanisms for monitoring and managing material service provider performance

Establishment of Effective Risk Management Frameworks:

• Develop robust operational risk management frameworks tailored to outsourcing
• Implement policies, procedures, and controls to mitigate these identified risks
  
• Ensure that these frameworks align with broader risk management objectives and strategies

Monitoring and Ongoing Supervision of Outsourcing Arrangements:

• Implement mechanisms to continue monitoring outsourcing arrangements and implementation of CPS 230
• Establish clear reporting lines and escalation procedures for addressing issues or breaches, as well procedures to notify APRA
  
• Conduct periodic reviews and assessments to ensure continued compliance

Reporting and Communication Obligations to Regulatory Authorities:

• Fulfil reporting requirements as stipulated by APRA — breaches must be reported within 72 hours of institutions becoming aware of an issue
• Maintain open communication channels with regulatory authorities
  
• Provide timely updates on material outsourcing arrangements and associated risks

Implications for Risk Managers Under New Requirements:

While the board is ultimately accountable for the implementation of the new regulations, risk managers will bear the weight of CPS 230 within financial services institutions. They must integrate CPS 230 requirements into existing risk management practices, collaborate with relevant stakeholders, and ensure that staff members involved in outsourcing activities receive adequate training and development.

Risk managers must report what actions they are taking to the board at regular intervals, ensuring those at the highest levels are aware of the changes and what their institution is making under the new regulations.

Implementation Strategies for CPS 230

Conducting Comprehensive Risk Assessments:

• Assess the inherent and residual risks associated with your outsourcing arrangements
• Utilise risk assessment tools and methodologies to identify and rank risks posed by material service providers
• Implement internal controls to manage key operational risks that have been identified
• Maintain relevant IT capability
• When an incident  is likely to have a material financial impact or a material impact on the ability of the entity to maintain its critical operations, institutions must make APRA aware as soon as possible
  

Developing Robust Due Diligence Processes:

• Establish clear criteria for vendor selection that limits risk and provides a framework that ensures operational resilience
• Conduct thorough background checks and assessments of prospective service providers
• Engage legal, compliance, and procurement teams in the due diligence process — having dedicated teams that overlook service provider management is essential
  

Designing Effective Risk Monitoring Mechanisms:

• Implement automated monitoring tools and systems for specialised teams to monitor
• Establish key performance indicators (KPIs) and metrics for measuring service provider performance
• Conduct regular reviews and audits to ensure compliance with contractual agreements
  

Establishing Clear Reporting Lines and Escalation Procedures:

• Designate responsible individuals or teams for overseeing outsourcing arrangements that work directly with the teams outlined above
• Establish clear channels and escalation procedures for reporting issues or breaches. Notifying  management and the board of breaches, as well as APRA, is essential
  

Regular Review and Updating of Policies and Procedures:

• Conduct periodic reviews of outsourcing policies and procedures to ensure you are keeping up with CPS 230 requirements and avoiding issues involving operational risk management
• Ensuring that staff members are aware of and trained on updated policies and procedures
  

Best Practices and Recommendations:

To navigate the challenges posed by the new regulations, risk managers should enter a proactive engagement with regulatory authorities. By keeping communication channels open with APRA, financial institutions can most easily report breaches and issues, as well as report possible threats.

Risk managers should engage in the continuous evaluation and enhancement of outsourcing governance frameworks within the institution, and adopt industry standards and benchmarks by collaborating with peer institutions and industry associations.

The investment in technology and automation solutions, such as those provided by RobabAI, help risk managers and institutions as a whole better avoid operational risks involving outsourcing to material service providers.

Changes Good for Operational Resilience

Overall, CPS 230 compliance measures will have a positive effect on Australia's financial services sector, and ensure institutions have the resilience and stability they need to avoid risk. By understanding the requirements of CPS 230 and implementing effective compliance strategies, risk managers can mitigate outsourcing risks and uphold the integrity of their institutions.