Critical third parties to the finance sector

Under the proposal, HM Treasury, in consultation with the financial regulators and other bodies, will be able to designate certain third party technology providers to financial services firms as ‘critical’. Although it is not yet clear what would constitute ‘critical’, earlier commentary from the UK regulators suggest that designation will focus on third parties that "may be a source of systemic risk to the financial stability of the UK". There are 3 key points to be aware of regarding the designation process:

• HM Treasury would have the power to designate parties as "critical" in consultation with the UK financial regulators and other bodies, and in some cases, the regulators may proactively recommend to the Treasury that certain parties be designated;
• Designation would take place under secondary legislation, taking into account criteria like the number and type of services a third party provides, and the materiality of those services; and
• HM Treasury would have to take into account any representations made by the potential critical third parties.

Once a third party provider has been designated as ‘critical’, the financial regulators will have the power to make rules relating to the provision of these material services, gather relevant information from critical third parties, and take formal action, including enforcement where needed.

Financial regulators will also have the ability to (i) set minimum resilience standards that critical third parties will be directly required to meet regarding any material services that they provide to the UK financial sector, (ii) require critical third parties to take part in a range of targeted forms of resilience testing, and (iii) publicise any failings. As a last resort, regulators may prohibit critical third parties from providing future services, or continuing to provide services to UK firms.

The Government intends to legislate for this regime “when parliamentary time allows” following which, the financial regulators will publish a joint Discussion Paper. Businesses should keep any eye out for the publication of the Discussion Paper, with a view to getting involved in the consultation when it opens to the public.