5.1 The PRA expects firms to:

• determine the materiality of every outsourcing and third party arrangement;

• perform appropriate and proportionate due diligence on all potential service providers; and

• assess the risks of every outsourcing arrangement irrespective of materiality.

Materiality assessment

Definition

5.2 The PRA Rulebook defines ‘material outsourcing’ as the outsourcing of ‘services of such importance that weakness, or failure, of the services would cast serious doubt upon the firm's continuing satisfaction of the threshold conditions or compliance with the Fundamental Rules’. [See the Notifications 2.3(e) Part of the PRA Rulebook.]

5.3 Materiality should be read as incorporating the concept of a ‘critical or important operational function’ in relevant retained EU legislation. The requirements in Article 31 of MODR or Article 274(5) of the Solvency II Delegated Regulation apply only to the outsourcing of critical or important operational functions.