In the Fall 2023 Semiannual Risk perspective report, the Office of the Comptroller of the Currency (OCC) highlights key risks facing the federal banking system. A focus of the report is the management of third-party fintech relationships, with the OCC emphasising the need for banks to maintain sound risk management practices amid increasing use of digital and electronic products and services. Here are some key insights from the report:
- The report underscores key risk themes, including credit, market, operational, and compliance risks.
- The OCC cautions banks considering fintech partnerships to scrutinize each third-party relationship and understand the risks involved.
- The report warns of Anti-Money Laundering (AML) compliance risks regarding fintech relationships and highlights other operational and compliance risks.
- Growing BSA/AML compliance risks due to the expanding use by banks of digital and electronic products and services are noted.
- The OCC notes the need for banks to ensure equal access to credit and fair treatment of consumers.
- The report recognizes the proliferation of new technologies in banking, posing operational risks.
- The OCC highlights the potential compliance, credit, reputation, and operational risks presented by artificial intelligence (AI).
The report brings attention to the importance of banks understanding the risks associated with each third-party relationship, and creating effective contracts to address potential default and termination. This follows recent OCC and FDIC consent orders involving banks regarding third-party risk management practices. The OCC also mentions the necessity of identifying “nested relationships” where fintech firms may be providing services to other fintech firms without suitable controls. In such cases, banks are held responsible for the practices of those partners.
With the increasing use of digital and electronic products and services, financial crime risks are also rising. The report highlights the surge in Suspicious Activity Report (SAR) filings related to fraud. Operational risks associated with new technologies, like faster and real-time payment products, are also emphasized. The OCC further draws attention to the risks presented by AI, including potential third-party risk, privacy concerns, cybersecurity risks, and potential consumer-facing bias.
In summary, the OCC’s report is a crucial reminder for banks to keep pace with the evolving fintech landscape by continuously evaluating their risk management policies and practices. The financial sector should heed the OCC’s advice and remain vigilant about potential risks in third-party fintech relationships and the integration of new technologies.
