Termination & the New Guidance

Earlier this week, we introduced you to the updated expectations for termination contained in the new interagency guidance.   It is important that banking organizations understand these expectations when ending a relationship with a third party.

According to the new guidance, banking organizations may terminate a relationship for various reasons, such as expiration or breach of the contract, the third party’s failure to comply with applicable laws or regulations, or the desire to seek an alternate third party, bring the activity in-house, or discontinue the activity.  When this occurs, it is important for management to terminate relationships in an efficient manner, whether the activities are transitioned to another third party, brought in-house, or discontinued all together.  Where appropriate, termination provisions should also consider transition services to successor third parties and a detailed transition plan.

Depending on the risk and complexity of the third-party relationship, banking organizations typically consider the following:

• Options for effective transition of services, such as potential alternate third parties to perform the activity,
• Relevant capabilities, resources, and timeframe required to transition the activity to another third party or bring in-house while still managing legal, regulatory, customer, and other impacts that might arise,
• Costs and fees associated with termination,
• Managing risks associated with data retention and destruction, information system integrations and access control, or other control concerns that require additional risk management and monitoring after the end of the third-party relationship,
• Handling of joint intellectual property, and
• Managing risks to the banking organization, including any impact to customers, if the termination happens because of the third party’s inability to meet expectations.

It is important that banking organizations review their existing third-party termination practices to ensure they align to these expectations.  This should include a review of associated contractual obligations to ensure alignment to expectations.  In our next post, we will discuss tools and tips that help support alignment.

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