Material outsourcing

Spec sheet // Glossary // MATERIAL OUTSOURCING
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Glossary · Third-party risk

Material outsourcing

Also called critical or important outsourcing, material third-party arrangement

Definition

Material outsourcing is an outsourcing arrangement so important that its weakness or failure would cast serious doubt on a firm's ability to meet its threshold conditions or regulatory principles. UK regulators use the term to decide which outsourcings need prior notification, stronger contracts, tested exit plans and closer board oversight.

SERVICE MAPPEDMATERIALITY TESTREGULATOR NOTICECONTRACT TERMS
Fig. 1 · Material outsourcing
PRA SS2/21 · PRA PS7/26 and FCA PS26/2 · EBA/GL/2019/02
Key rulesPRA SS2/21 · PRA PS7/26 and FCA PS26/2 · EBA/GL/2019/02
Applies toBanks, building societies, PRA-designated investment firms and insurers
RegionsUK
01

How it works

Firms run a materiality assessment before signing and at each review. The test looks at the service's link to important business services, the volume of customer data involved, how hard the provider is to replace and the impact of an outage. Arrangements judged material are notified to the regulator in advance, carry mandatory contract terms such as audit and access rights, and sit on the board's outsourcing register.

The label drives cost and effort. A material outsourcing needs fuller due diligence, a documented exit plan and stressed business continuity testing. Supervisors review these arrangements closely because a failure at one provider can stop payments or claims handling across a firm. From 18 March 2027 UK firms also notify material third-party arrangements under a joint PRA and FCA regime.

Step 1Map the serviceLink the outsourced service to important business services.
Step 2Test materialityScore customer impact, substitutability, data and outage effect.
Step 3Notify regulatorTell the PRA or FCA before entering the arrangement.
Step 4Contract and exitAdd audit rights and document a tested exit plan.
02

The rules

UK · 31 March 2022PRA SS2/21Supervisory Statement 2/21 Outsourcing and third party risk management

Sets PRA expectations for outsourcing, defines the material outsourcing test and requires notification, due diligence and exit plans for material arrangements.

Banks, building societies, PRA-designated investment firms and insurers
UK · 18 March 2026PRA PS7/26 and FCA PS26/2Operational resilience: Operational incident and third-party reporting

Introduces notifications for material third-party arrangements and a related register, applying from 18 March 2027.

PRA-regulated and FCA-regulated firms
EU · 30 September 2019EBA/GL/2019/02EBA Guidelines on outsourcing arrangements

EU guidelines use the equivalent term critical or important functions and set stricter governance for outsourcing them. EBA/GL/2026/09 will repeal them once it applies.

Credit institutions, investment firms, payment and e-money institutions
03

Common questions

Who decides whether an outsourcing is material?

The firm decides, using a documented assessment approved through its governance. The PRA and FCA can challenge the conclusion in supervision. A firm that wrongly classes an arrangement as non-material risks missing notification and contract requirements.

Is material outsourcing the same as critical or important outsourcing?

They are close equivalents. The PRA chose material outsourcing to avoid confusion with other meanings of critical. EU rules under the EBA guidelines and DORA use critical or important functions for the same tier of arrangements.

Does intragroup outsourcing count?

Yes. PRA SS2/21 says intragroup arrangements are not inherently less risky than those with outside providers. A service supplied by a group company can be material and then follows the same notification and contract expectations.

What changes in 2027?

From 18 March 2027 the PRA and FCA require notification of material third-party arrangements, including some that are not outsourcing. Firms also keep a register of those arrangements and submit it through a shared regulatory portal.