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.  Let’s look now at tools and best practices to support alignment with the new guidance. 

 When terminating third-party relationships, banking organizations should consider the following tools and best practices: 

• Standardize third-party offboarding processes, 
• Create a termination checklist that includes items specific to each third-party type, such as type of services provided or business units impacted, 

• Create transition service plans that detail how services are to be transitioned, costs associated with transition services, and business continuity protections, 
• Digitize these checklists and plans, using AI and other tools to automate checklists, workflows, and alerts, 
• Use digital tools to monitor offboarding and to automatically update stakeholders, 
• Use technology to ensure all relevant data is migrated to the new third party or in-house, including testing and validation procedures, and 
• Use digital tools to track ownership of IP and to automate document required notices of return/destruction of confidential information. 

 Join us next week as we continue our Market Insight series, where we will discuss supervisory reviews under the new guidance.    

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