FSOC: Agencies Need Power to Oversee Third-Party Service Providers

The Financial Stability Oversight Council (FSOC) said Friday (Dec. 6) that Congress should pass legislation ensuring that relevant agencies have the examination and enforcement powers they need to oversee their regulated entities’ third-party service providers.

The FSOC said these relevant agencies include the Federal Housing Finance Agency and the National Credit Union Administration, according to a Friday press release announcing the council’s approval of its 2024 annual report.

It also recommended that federal banking regulators continue to support information sharing among state and federal regulators by coordinating third-party service provider examinations, working collaboratively with states and identifying additional ways to do so.

“Financial institutions are increasingly using third parties to provide a range of products and services,” the release said. “While third-party service providers can offer benefits, they may also introduce or amplify risks, in part by limiting a financial institution’s access to, control over, and oversight of its data or systems.”

The increasing use of third-party service providers is one of several vulnerabilities and emerging threats to U.S. financial stability that the FSOC identified in its annual report.

It also pointed to the increasing frequency of cyber incidents, the weakening credit conditions in commercial real estate (CRE), the reliance of some banks on non-deposit funding and uninsured funding, the growing market value of the crypto-asset ecosystem and the financial vulnerabilities stemming from investment funds.

“This year, the financial system has continued to support a strong economy, marked by declining inflation, solid economic growth and a healthy labor market,” Secretary of the Treasury Janet L. Yellen said in the release. “But we must remain focused on ensuring the financial system remains resilient and addressing emerging vulnerabilities.”

This announcement came a day after it was reported that the Federal Deposit Insurance Corporation (FDIC) has begun more closely tracking FinTechs that partner with banks, aiming to spot potential problems before they affect the banks.

It also follows a Nov. 20 statement by Acting Comptroller of the Currency Michael J. Hsu supporting “federal payments regulation and a chartering regime for nonbanks.” Hsu said that if FinTechs remain licensed and regulated only at the state level, some of them are likely to exploit any regulatory gaps.

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