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Third-party risk management (TPRM) is a must for financial institutions. It helps identify and address risks from vendors, like cybersecurity threats, operational disruptions, and compliance issues. With financial firms relying on numerous vendors - often over 175 for larger institutions - poor vendor oversight can lead to data breaches, regulatory penalties, and reputational damage.
Key points to know:
In short, TPRM isn't just about compliance - it's about protecting your business from vendor-related failures while meeting evolving regulatory demands.
Financial institutions operate under significant regulatory oversight to manage risks associated with third-party vendors. This scrutiny aims to safeguard against failures, breaches, and penalties. As these institutions increasingly rely on external providers for critical operations, regulators are ramping up their focus on relationships with entities like cloud service providers and fintech firms. This evolving landscape reflects the shifting priorities of regulators in the digital era.
On June 27, 2023, the Federal Reserve, FDIC, and OCC released updated guidance addressing third-party risks. These updates emphasize that boards of directors must ensure their institutions develop and implement third-party risk management (TPRM) policies that align with their risk tolerance and the complexity of their vendor relationships. The FDIC has broadened its definition of "third party" to include all entities involved in business relationships with financial institutions, acknowledging the intricate nature of today’s vendor ecosystems.
FINRA has also expanded its focus, adding a dedicated section on third-party risk management to its Annual Regulatory Report. This includes rules on supervision, business continuity, and safeguarding customer data.
On October 21, 2025, the New York Department of Financial Services issued guidance requiring covered entities to adopt a proactive, risk-based approach to managing third-party relationships. This guidance specifically addresses emerging risks tied to cloud computing, artificial intelligence, and fintech partnerships.
In addition to these regulatory frameworks, institutions are encouraged to use standards like ISO 27001 and NIST SP 800-53 to evaluate vendor security and compliance. Effective TPRM programs must address a range of risks - operational, cybersecurity, financial, regulatory, and reputational - while accounting for both direct vendors and their subcontractors.
Regulators now stress the importance of collecting and verifying control information directly from vendors rather than relying solely on self-reported data. Detailed documentation of risk identification, assessment, mitigation, and ongoing monitoring is critical for demonstrating compliance. For instance, one major bank streamlined its vendor assessments by reducing the number of questions by 80% through standardized practices.
Looking ahead, proactive monitoring and continuous risk evaluation are becoming central to regulatory expectations in 2025.
Vendor management remains a top concern for regulators in 2025, with examiners focusing on how financial institutions oversee third-party relationships. FINRA has reported a rise in cyberattacks and system outages among vendors supporting essential financial systems. A single vendor's cyber failure now has the potential to disrupt multiple firms, creating systemic risks.
Regulators are honing in on several critical areas during their assessments. They are examining vendor oversight processes across the entire lifecycle - from initial due diligence to ongoing monitoring and secure exit strategies. Data protection has become a major focal point, requiring institutions to enforce strict controls over how third parties handle sensitive information. This includes involving vendors in cybersecurity drills, incident response testing, and maintaining an up-to-date inventory of third-party services and infrastructure.
Business continuity planning is another key area. Regulators expect institutions to evaluate how vendors manage risks and ensure they have robust disaster recovery plans to maintain operations during disruptions. The shift from periodic assessments to continuous monitoring has also gained traction, encouraging firms to identify vulnerabilities, track data breaches, and respond to regulatory changes that may impact a vendor’s risk profile.
The growing reliance on cloud-based and SaaS/PaaS solutions adds another layer of complexity to third-party risk management. Regulators are paying close attention to risks associated with fintech and digital service providers. Meanwhile, the rise of artificial intelligence introduces new challenges, prompting institutions to develop specialized methods for evaluating AI-driven vendor tools and services.
Enforcement priorities have shifted toward validation and verification. Regulators now expect institutions to go beyond vendor self-assessments by conducting on-site reviews, analyzing audit reports, and testing security controls to ensure compliance with required standards. By adopting a risk-based approach that allocates resources according to a vendor’s critical importance, institutions can better manage exposure to third-party risks. This aligns with the broader regulatory push for real-time monitoring and proactive risk management.
To tackle operational, cybersecurity, and reputational risks, implementing a Third-Party Risk Management (TPRM) program is essential. A well-designed TPRM program spans the entire vendor lifecycle and integrates key elements to safeguard your vendor ecosystem.
An effective TPRM program includes several interconnected steps to identify, assess, and manage vendor risks. It begins with vendor identification and inventory management, where all vendor data is consolidated to create a clear map of your third-party ecosystem. This inventory categorizes vendors based on the risks they pose.
Next comes risk assessment, which evaluates vendors using recognized frameworks like ISO 27001 or NIST SP 800-53. Many organizations streamline this process with automation tools, third-party risk exchanges, or standardized questionnaires to pinpoint vulnerabilities efficiently.
Once risks are identified, the focus shifts to risk mitigation. This involves prioritizing risks according to your organization's tolerance levels and implementing measures such as contractual safeguards, security protocols, and operational controls to reduce risks to acceptable levels.
Continuous monitoring is another critical piece. This step helps detect changes in a vendor's risk profile, whether due to data breaches, regulatory updates, or financial instability.
Detailed recordkeeping is equally important. TPRM software can simplify the process by maintaining auditable records of vendor interactions and risk mitigation efforts, aiding compliance with regulations like FINRA Rules 3110 and 4370.
For instance, a large multinational bank streamlined its TPRM processes by collaborating with other financial institutions and specialists to implement standardized third-party risk assessments (KY3P Assessments). This unified approach reduced the number of questions posed to third parties by 80% compared to their previous standalone methods.
A strong TPRM program also aligns with the organization's broader risk management strategies, covering areas like geopolitical, financial, compliance, privacy, operational, and cybersecurity risks. This comprehensive approach ensures vendor relationships are evaluated not just for immediate issues but for their overall impact on resilience and regulatory compliance.
After establishing these core elements, it’s time to extend oversight to subcontractors and fourth parties.
Once controls for direct vendors are in place, attention must turn to subcontractors. Vendors often outsource critical tasks to subcontractors, introducing potential supply chain vulnerabilities. Mapping these fourth-party relationships is crucial.
To manage these risks, ensure that vendors disclose details about their subcontractors, especially those handling sensitive data or critical operations. Contractual agreements should require vendors to notify your organization of any changes in their subcontractor arrangements, particularly for critical functions. Additionally, extend continuous monitoring to include subcontractors, with vendors providing regular updates on performance, security incidents, and compliance.
For high-risk subcontractors, direct assessments or proof of compliance may be necessary. Risk assessment frameworks should also account for the added complexity of these relationships, evaluating not just the vendor's risk management but also its ability to oversee subcontractors. Maintaining clear documentation and audit trails for fourth-party oversight is key to ensuring transparency and regulatory alignment.
Continuous monitoring must be paired with a proactive incident response plan to minimize disruptions and safeguard customer interests. This plan should integrate seamlessly with the institution's broader business continuity and disaster recovery strategies, addressing challenges unique to third-party failures.
The plan should define potential incident scenarios - such as system outages, data breaches, vendor bankruptcies, or regulatory violations - and establish clear escalation procedures. These procedures should consider factors like the vendor's criticality, the sensitivity of the data involved, the number of customers affected, and the potential financial or reputational fallout.
A crucial component is ensuring vendors are contractually obligated to report security incidents, outages, or regulatory issues within a set timeframe - typically 24 to 48 hours for critical incidents. Additionally, protocols should cover secure data return or destruction when vendor relationships end.
Roles and responsibilities for handling incidents must be clearly outlined, including technical response, regulatory notifications, and customer communications. Assign a vendor incident response coordinator to act as the primary contact during incidents.
Testing is another vital step. Involving third-party vendors in cybersecurity and incident response drills helps identify gaps and improve coordination before an actual incident occurs. Communication protocols should ensure timely and accurate updates to regulators, customers, and the media.
Recovery procedures need to focus on restoring operations, whether by activating backups, switching vendors, or verifying data integrity. FINRA Rule 4370 emphasizes the need to assess vendors' risk management and confirm their disaster recovery capabilities to maintain operations during disruptions.
Regularly updating the incident response plan to reflect changes in the vendor landscape, new threats, and lessons learned from past incidents ensures the institution stays prepared for vendor-related challenges. This proactive approach strengthens resilience and reduces the impact of disruptions.
Financial institutions are navigating a world where vendor relationships introduce risks that often lie outside their direct control. According to FINRA, there’s been a sharp rise in cyberattacks and outages involving third-party vendors critical to financial systems. As a result, managing vendor risks has become a regulatory priority for 2025. The challenge grows with the increasing number of third-party partnerships, which significantly expand the potential attack surface.
The adoption of cloud services, fintech tools, and AI technologies adds new layers of complexity. Recent supply chain attacks, like those involving MoveIt and Applied Materials, highlight how a single vendor breach can ripple across multiple organizations simultaneously. Unlike internal threats that institutions can directly manage, third-party vulnerabilities require a completely different approach. This underscores the importance of focusing on cybersecurity and risks tied to AI systems.
Third-party vendors often have access to sensitive customer data, internal systems, and other critical information, making them prime targets for cyberattacks. The risk doesn’t stop with direct vendors; it extends to their subcontractors and other service providers, creating a multilayered web of potential vulnerabilities. To manage this complexity, financial institutions must evaluate not only their vendors’ security measures but also how those vendors handle their subcontractors.
In October 2025, the New York Department of Financial Services issued guidance warning that reliance on third-party technologies - like cloud computing, file transfer systems, AI, and fintech solutions - will continue to grow, increasing exposure to threats. AI-related risks, in particular, bring challenges around data governance, transparency, and accountability. Financial institutions must understand how vendors use AI systems, what data these systems access, and what safeguards are in place to prevent misuse or unintended consequences.
To address these risks, financial institutions should conduct detailed risk assessments using established frameworks like ISO 27001 or NIST SP 800-53. These frameworks can be tailored to evaluate AI-enabled vendors by requiring transparency about AI capabilities, data usage, and security controls. Given the rapid pace of AI development, ongoing monitoring protocols are critical to catching emerging vulnerabilities.
Independent third-party certifications, such as SOC 2 or ISO 27001, can provide extra assurance of a vendor’s security practices. Institutions should also ensure vendor contracts include robust data security requirements to meet regulatory standards. Additionally, involving vendors in cybersecurity drills and incident response testing can help identify weaknesses before real incidents occur, strengthening overall defenses.
Reducing over-reliance on critical vendors is another key strategy. By focusing on data portability, modular services, and evaluating alternative providers, firms can mitigate risks tied to vendor concentration. When a single vendor failure could disrupt operations, having contingency plans and backup providers is essential for business continuity.
Managing vendor relationships at scale is no small task, and manual processes simply can’t keep up. Technology offers solutions to streamline oversight and reduce workload. For example, assessment automation software enables more frequent and thorough risk evaluations, helping organizations identify risks that align - or don’t - with their risk tolerance.
Third-party risk exchanges simplify the initial vendor evaluation process by offering pre-completed assessments. Instead of each institution vetting the same vendors independently, these exchanges use standardized assessments to cut down on redundant efforts. This approach not only saves time but also improves the quality of vendor evaluations.
Automated monitoring tools provide continuous updates on vendor risk profiles, alerting institutions to critical changes such as data breaches, regulatory shifts, or financial instability. Unlike one-time assessments, which can quickly become outdated, continuous monitoring offers real-time insights into a vendor’s evolving risk landscape. These tools also streamline the process of collecting and evaluating vendor compliance data, making it easier to send and manage questionnaires.
Centralizing TPRM processes across departments can further enhance efficiency. Historically, many institutions have managed vendor relationships in silos, with each department conducting its own assessments. This fragmented approach leads to inconsistent practices and visibility gaps. A unified, technology-driven TPRM function ensures consistent standards, reduces duplication, and provides a comprehensive view of vendor risks across the organization.
Standardized tools can capture critical risk data - such as cybersecurity, privacy, business resilience, and ESG factors - offering a holistic view of vendor performance. By embedding technology into TPRM operations, financial institutions can scale their risk management efforts while maintaining rigorous oversight and reducing the workload on risk professionals.
The shift from simply collecting data to actively managing vendor risks marks a major evolution in how institutions approach TPRM. Technology plays a key role in this transformation by automating routine tasks, allowing risk professionals to focus on strategic mitigation efforts. High-risk vendor relationships should be escalated through governance frameworks and included in board-level reporting, ensuring that senior leaders stay informed about the most pressing risks. This tech-driven evolution naturally sets the stage for the structured implementation process outlined in the next section.
A well-structured plan is key to improving a Third-Party Risk Management (TPRM) program. Start by evaluating your current processes, then address high-priority risks, and finally, set up metrics to measure performance.
The first step is to take stock of all third-party relationships. Go beyond just listing vendor names - categorize each vendor based on their importance and the risks they pose. Consider factors like their access to sensitive data and their role in your core operations.
Check if your organization has documented TPRM policies and procedures that align with your risk tolerance and the complexity of your vendor relationships. Regulatory bodies like FINRA have been paying closer attention to third-party risks, as seen in their 2025 Annual Regulatory Oversight Report, which introduced a new focus on this area. Many firms have struggled during examinations because they lacked thorough TPRM policies.
Assess your program across five key areas: vendor identification and evaluation processes, ongoing monitoring, documented risk mitigation strategies, compliance with standards like ISO 27001 or NIST SP 800-53, and clear offboarding protocols.
The tools you use for assessments also reflect the maturity of your program. Are you relying on standardized questionnaires, risk exchanges, or automated tools? Or are you still using scattered spreadsheets managed by different departments? For example, one multinational bank streamlined its TPRM by centralizing processes, reducing the length of vendor questionnaires by 80%. This change allowed them to handle thousands of vendor relationships more efficiently without sacrificing quality.
It's also critical to have skilled TPRM professionals who oversee vendor data collection, compliance checks, and contract management. If vendor management is fragmented across departments, you risk missing key vulnerabilities. Additionally, consider whether your organization monitors fourth parties - the subcontractors and partners of your third parties. These indirect relationships can pose significant risks, especially in sectors like finance, where a single compromised subcontractor can disrupt the entire ecosystem.
Once you’ve assessed the maturity of your TPRM program, focus your resources on addressing the most pressing risks.
A risk-based approach helps you focus on vendors that pose the greatest threat, such as those with access to critical systems or sensitive data.
Start by categorizing vendors into tiers based on their importance. Tier 1 vendors include those with direct access to critical systems, customer data, or essential business functions - like payment processors or core software providers. Tier 2 vendors handle important but non-critical tasks, while Tier 3 vendors provide more peripheral services. Your most thorough assessments and monitoring efforts should focus on Tier 1 vendors, while Tier 2 and Tier 3 vendors may require less frequent reviews.
When assessing risks, look beyond cybersecurity. Consider:
To prioritize, assign risk scores to vendors and determine whether these align with your organization's risk tolerance. Vendors involved in critical functions like payment processing or regulatory reporting should receive the most attention. For instance, a cyberattack or outage at one of these vendors could ripple across multiple firms simultaneously, making them particularly high-risk.
When planning improvements, tackle the most impactful gaps first. If your organization lacks continuous monitoring, implementing such systems should take precedence over refining vendor questionnaires. Similarly, if fourth-party risks aren’t being addressed, establishing visibility into subcontractors should be a priority, especially for critical vendors. Replacing manual spreadsheets with automated platforms can also enhance efficiency and consistency.
Unifying TPRM processes across departments is another key step. A centralized approach provides a single view of third-party risks and ensures consistent standards across your organization. High-risk vendor relationships should be escalated through governance frameworks and included in board-level reporting to keep senior leaders informed.
With high-risk vendors identified and priorities set, the next step is to measure the effectiveness of your TPRM initiatives.
Tracking performance metrics reinforces your organization’s ability to manage third-party risks effectively. Use both activity metrics and outcome-focused KPIs to measure progress.
Activity metrics focus on program execution. Examples include:
Outcome-focused KPIs measure the program’s impact. Examples include:
Operational resilience metrics are especially important as regulatory priorities evolve. Track vendor business continuity test results, percentage of vendors with disaster recovery plans, average recovery times for critical vendors, and fourth-party risks identified and managed.
Document your program’s progress over time. Highlight milestones like transitioning from manual assessments to automated platforms, creating dedicated TPRM roles, and moving from one-time assessments to continuous monitoring.
To show the value of your TPRM program to executives, quantify risk reduction in financial terms. For instance, instead of merely reporting 150 vendor assessments completed, frame it as, “The TPRM program prevented $2.5 million in potential losses by identifying and addressing vendor security gaps” or “Continuous monitoring uncovered 12 critical vulnerabilities before they could be exploited.” This approach helps leadership see the return on investment in TPRM resources.
Ensure board-level reporting aligns with your TPRM strategy. Executives need to understand high-risk relationships, remediation timelines, and how vendor risks could affect strategic goals. Regular updates demonstrate that TPRM is not just a compliance exercise but a crucial strategy to protect your organization’s operations, reputation, and customer trust.
As your program matures, your metrics should evolve. Early-stage programs might focus on activity metrics like assessment completion rates, while more advanced programs shift toward outcome metrics like risk reduction and incident prevention. Regardless of where you are in the process, maintaining an accurate inventory of third-party relationships is the cornerstone of effective TPRM. Without knowing who your vendors are and what they do, even the best metrics won’t shield your organization from potential risks.
Third-party risk management (TPRM) plays a critical role in turning potential vulnerabilities into strengths. For financial institutions juggling numerous vendors, each partnership introduces risks that could ripple through their operations.
The stakes have never been higher. Regulatory bodies like the OCC, Federal Reserve, and FDIC have emphasized the importance of robust TPRM practices in their 2023 interagency guidance. These practices aren’t just about compliance - they’re essential for safeguarding customers, investors, and employees while ensuring secure and steady growth.
To meet these expectations, organizations must go beyond traditional approaches. Tactical risk controls and continuous vendor oversight are no longer optional. Effective TPRM requires a comprehensive view of the supply chain, extending to fourth parties and subcontractors. As highlighted earlier, understanding and managing risks at every level of the ecosystem is key. Moving from periodic assessments to real-time monitoring is also a game-changer, especially as threats from areas like cloud computing, file transfer systems, AI, and fintech solutions continue to expand.
One example of success comes from a large multinational bank that adopted a unified TPRM strategy. By standardizing assessment processes across business units, the bank reduced the number of questions sent to third parties by 80%. This shift didn’t sacrifice quality - it allowed the oversight team to focus on active risk mitigation instead of endless data collection.
A proactive, risk-based TPRM strategy is essential. This means implementing standardized assessment frameworks, escalating high-risk relationships through governance structures, and ensuring these risks are visible at the board level. It also involves planning for the future - reducing reliance on critical vendors by exploring options like data portability, modular services, or alternative providers.
TPRM is more than a compliance exercise - it’s a cornerstone of operational resilience. By embedding TPRM into your organization’s core processes, you not only manage risks but also strengthen partnerships with vendors who align with your security and compliance standards. This approach builds trust with regulators, minimizing the chances of enforcement actions or reputational harm. Ultimately, effective TPRM lays the groundwork for secure, sustainable growth.
An effective Third-Party Risk Management (TPRM) program is essential for financial services firms to maintain compliance, reduce risks, and safeguard sensitive information. Here are the core elements that make up a strong TPRM approach:
By focusing on these practices, financial institutions can not only protect their operations and meet regulatory standards but also cultivate stronger, more reliable relationships with their third-party vendors.
Emerging technologies like AI and cloud computing are transforming how financial services handle third-party risk management, making processes faster, more precise, and easier to scale. AI-driven tools can sift through massive datasets to uncover potential risks, keep tabs on vendor performance, and spot patterns that might signal vulnerabilities. This means financial institutions can rely on data-backed insights to take action before problems arise.
Cloud computing, on the other hand, boosts collaboration and transparency by providing centralized data storage and real-time access to essential information. It also offers the flexibility to scale operations, helping firms quickly respond to new regulations or growing demands. Together, these technologies simplify risk management, cut down on manual tasks, and improve compliance efforts across the financial industry.
To keep up with changing regulatory demands, financial institutions need a well-organized and forward-thinking strategy for managing third-party risks. This means performing comprehensive due diligence before bringing vendors on board, consistently monitoring their performance, and verifying that they comply with all relevant laws and standards.
On top of that, using strong risk assessment frameworks and incorporating technology to automate monitoring tasks can make compliance efforts more efficient. Staying updated on regulatory changes and keeping detailed records of all interactions with third parties are also essential steps to reduce risk and ensure adherence to regulations.
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