Build security and resilience into the supply chain.

Financial institutions no longer operate as self-contained entities. Fund administrators, cloud providers, software vendors, data centres, custodians and consultants all play a role in delivering services to clients. This network of partners creates efficiency and innovation, but it also creates risk. Increasingly, cyber incidents originate through its third parties as seen in recent high level cybersecurity breaches in the U.K.

Third Party Risk Management (TPRM) is therefore not just a procurement function. It is a strategic capability that protects resilience, satisfies regulators and preserves investor confidence. For senior executives, the question is how to manage third party risk in a way that is practical, proportionate and integrated into overall governance.

Defining Third Party Risk Management

Third Party Risk Management is the process of identifying, assessing, monitoring and mitigating risks associated with external partners who provide goods or services. In cybersecurity terms, it means ensuring that vendors, suppliers and contractors uphold standards that protect sensitive data, maintain system availability and comply with regulation.

It is more than due diligence at onboarding. Effective TPRM is an ongoing discipline that spans the full lifecycle of a relationship: from selection, through contract, to continuous monitoring and eventual exit.

Why It Matters to Financial Services

Financial institutions are highly dependent on third parties. Cloud platforms host trading applications, payment processors handle transactions, analytics firms provide insights and managed service providers support infrastructure. Each connection extends the organisation’s digital footprint beyond its direct control.

When a vendor suffers a breach, the consequences flow downstream. Client data may be exposed, operations disrupted, and reputations damaged. Regulators are increasingly clear that firms cannot outsource responsibility. Whether the weakness lies in a supplier’s software or a partner’s internal controls, the regulated firm remains accountable.

Investor confidence also hinges on TPRM, with investors asking questions about vendor oversight, particularly when capital is entrusted to firms that rely on complex technology supply chains. Being able to demonstrate robust controls is now part of winning and retaining mandates.

From Contracts to Collaboration

Historically, many firms treated TPRM as a contractual exercise, where vendors signed agreements to meet security standards, and firms assumed compliance. However, modern TPRM requires ongoing collaboration. Firms must actively monitor vendors, share intelligence and conduct joint exercises. The goal is not to shift liability but to raise collective resilience.

This begins with risk-based prioritisation, as not all third parties pose equal risk. A catering supplier does not need the same scrutiny as a cloud hosting provider. By classifying vendors according to the sensitivity of data they handle and the criticality of the services they provide, firms can apply proportionate oversight.

Monitoring should be continuous, not annual. Automated tools can provide visibility into vendors’ security posture, while direct engagement ensures that issues are addressed promptly. Where vendors are particularly critical, joint testing and scenario planning can provide assurance that recovery capabilities are aligned.

Common Challenges and Solutions

Pursuing stronger TPRM comes with its challenges. One challenge is visibility. Large institutions may have hundreds or even thousands of vendors, many of whom subcontract further. This creates a complex chain that is difficult to map. The solution lies in building a process for capturing a clear and up to date inventory of third parties, supported by governance that requires business units to register new relationships.

Another challenge is proportionality. Excessive requirements can strain vendor relationships and slow innovation. Conversely, insufficient scrutiny exposes the firm to risk. Risk-based frameworks help strike the right balance, focusing resources where they matter most.

A further challenge is reliance on questionnaires. Many firms rely heavily on self-attestations from vendors, which may not reflect reality. Complementing questionnaires with independent assessments, certifications and monitoring tools improves assurance.

Finally, cultural differences can create friction. Vendors may operate in jurisdictions with different regulatory expectations or business norms. Clear communication, contractual alignment and ongoing engagement are key to bridging these gaps.

The Role of Leadership

Leadership has a pivotal role in elevating TPRM from an operational task to a strategic priority. Boards should define risk appetite for third party relationships, ensuring it aligns with the firm’s overall resilience objectives. They should receive regular reporting on vendor risks, incidents and remediation progress.

Executives also need to sponsor collaboration between procurement, legal, compliance, technology and security functions. TPRM touches each of these areas, and siloed efforts are ineffective.

Most importantly, leaders should frame TPRM as part of the firm’s value proposition. By demonstrating that vendor oversight is rigorous, transparent and effective, firms can build confidence with clients and investors.

Measuring Maturity

Measuring TPRM maturity requires looking beyond whether contracts exist. Firms can assess their progress across several dimensions:

• Governance: Is TPRM overseen at senior levels, with clear accountability and reporting?
• Vendor inventory: Does the firm maintain an accurate, comprehensive register of third parties and their risk classifications?
• Due diligence: Are assessments proportionate, evidence-based and regularly updated?
• Ongoing monitoring: Is vendor performance tracked continuously, and are findings acted upon?
• Incident response: Are third parties included in resilience testing and recovery planning?
• Continuous improvement: Does the firm learn from incidents, audits and exercises to refine its approach?

Mapping progress against maturity models allows firms to benchmark themselves, identify gaps and prioritise investment. Transparent communication of results reassures regulators and investors.

In summary

Strong TPRM delivers benefits beyond risk reduction. It enables innovation by allowing firms to adopt new technologies and partnerships with confidence. It streamlines regulatory engagement, as supervisors increasingly scrutinise third party oversight. It reassures investors that resilience extends across the supply chain.

Perhaps most importantly, it builds trust. Clients know that their data and transactions are protected not only within the firm but across the ecosystem of partners. In a competitive market, that trust can be decisive.

Third Party Risk Management is not simply about compliance or contracts. It is a strategic discipline that shapes resilience, reputation and investor confidence. For financial institutions, it is essential to recognise that security extends beyond the perimeter and into every relationship.

By defining clear governance, adopting proportionate oversight, addressing challenges and measuring maturity, firms can build third party risk management into a source of strength.

The outcome is greater confidence in operations, stronger alignment with regulators and deeper trust with clients and investors.