Governance of Financial Services Outsourcing: Managing Misconduct and Third-Party Risks

Abstract

With financial institutions increasingly outsourcing their activities, they face a record number of fraud and misconduct cases arising from third-party services. We survey financial institutions to better understand which governance mechanisms may improve the monitoring and management of third-party relationships. Overall, our results suggest that there are gaps in traditional governance arrangements. We find that financial institutions rely mainly on internal monitoring to detect fraud and that whistleblowing plays an important role in mitigating misconduct risks. Finally, we report evidence that vendor dependency and product complexity play a pronounced role in delaying termination of agreements.

Keywords: Outsourcing, financial institutions, governance, fraud and misconduct

JEL Classification: D22, D23, G20, G34