Before entering outsourcing contracts, banks conduct thorough data protection due diligence on third parties such as payment, insurance and credit service providers. Banks must safeguard sensitive customer data whilst ensuring their partners uphold the same high standards. Non-compliance risks severe penalties and reputational damage, making rigorous due diligence essential.
This blog outlines the key areas banks scrutinise during their due diligence processA series of actions or steps taken in order to achieve a particular end., as well as common pitfalls, and the steps providers can take to prepare for successful partnerships in this highly regulated industry.
For the purposes of this blog, the General Data Protection RegulationRegulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (General Data Protection Regulation). (GDPR) will refer to both the EU GDPRRegulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons regarding the processing of personal data and on the free movement of such data (General Data Protection Regulation). and the UK GDPRThe UK General Data Protection Regulation. Before leaving the EU, the UK transposed the GDPR into UK law through the Data Protection Act 2018. This became the UK GDPR on 1st January 2021 when the UK formally exited the EU.. Although the legislations are essentially similar, there are some key differences, and we recommend consulting a data protection professional to ensure compliance.
This blog was updated on 22/01/25 with further information regarding why data protection matters to banks.
Banks operate under stringent regulatory frameworks. There are sector-specific laws governing their operations, including financial conduct rules that require the fair treatment of customers. Banks are also subject to data protection regulations, such as the GDPR, that ensure the security and confidentiality of customer data.
FCA standards intersect with data protection regulations by requiring providers to maintain robust governance, operational resilience, and secure data handling practices. Banks assess providers’ compliance with both FCA rules and the GDPR to ensure customer data is protected, risks are mitigated, and trust is upheld through strong incident response and third-party management frameworks.
Non-compliance can lead to severe penalties and operational disruptions, making it crucial for banks to ensure their partners adhere to high data protection standards.
Customer trust also plays a significant role in the Financial Services sector, and data breaches can result in significant reputational damage. Individuals expect their personal and financial data to be handled with the utmost care by banks and their partners.
Therefore, effective collaboration between banks and third-party providers is crucial. Data sharing requires secure and seamless data flows and providers must demonstrate they can effectively process and safeguard data at every stage, from collection to destruction.
To meet the strict standards of financial institutions, providers should be prepared to address these critical areas:
Clear and robust data governance is essential for meeting the expectations of financial institutions. Providers should develop clear policies for data handling and processing, clearly outlining:
Banks typically need to see evidence that their partners are compliant with relevant data protection laws, such as the GDPR. This could include reviewing documented compliance measures, such as Data Protection Impact Assessments (DPIAs), Record of Processing Activity (RoPA), and audit records.
It is vital for banks to ensure their partners have strong security measures in place to protect against data breaches. Appropriate technical protections include encryption, secure access controls, and security audits.
Banks expect providers to have well-documented incident response plans that enable swift action in the event of a data breach. Providers should have defined policies and protocols with documented evidence of handing incidents and resolutions, alongside proof of regular testing.
If providers rely on sub-processors or other third parties, banks will likely review how these relationships are managed. It is important to conduct due diligence on all vendors and supply chain third parties and have robust contracts with sub-processors that include data protection clauses.
To help you prepare for bank due diligence, it is advisable to take these essential steps:
Action | Details |
Governance and Policies | |
Data protection policy | A data protection policy should document what data is collected, how it is stored, and retentionIn data protection terms, a defined period of time for which information assets are to be kept. durations. It should also contain access control details, data sharing guidelines, and incident response measures. Providers should regularly review their data protection policies to ensure compliance with evolving regulations, technological advancements, and operational changes. |
Staff training | Data protection training should be conducted to ensure employees understand their responsibilities and best practices for handling personal dataInformation which relates to an identified or identifiable natural person.. Regularly updating and reinforcing this training helps ensure all staff members are equipped to handle data responsibly and securely. |
Data Mapping and Classification | |
Data mapping | Regular data flow mapping helps maintain a clear understanding of how data moves within the organisation, ensuring better data protection and compliance. |
Data classification | Providers should determine the types of data their organisation handles, classify it by sensitivity, and ensure it is appropriately protected. |
Legal Compliance | |
Procedures for subject rights | Organisations should implement clear and efficient procedures to facilitate data subject rightsUnder UK and EU data protection regulation, data subjects have a number of rights available to them, including the right to be informed, access, rectification, erasure, restrict processing, data portability, to object and further rights in relation to automated decision making and profiling., including access, rectification, and erasure. This will usually include notifying the Bank of any Data SubjectAn individual who can be identified or is identifiable from data. Access Requests. |
Security Practices | |
Data encryption | Data encryption standards should align with industry standards. Data should be encrypted both when stored at rest and in transit. |
Security audits | A regular audit schedule will ensure security measures are up-to-date and effective against evolving threats. |
Incident Management | |
Breach notification | Under Article 33 of the GDPR, organisations may be required to notify the relevant Supervisory AuthorityAn authority established by its member state to supervise the compliance of data protection regulation. of a personal data breachAn incident which leads to the accidental or unlawful destruction, loss, alteration, unauthorised disclosure or access to personal data. with 72 hours of becoming aware of it. Providers should develop and test a robust incident detection and response plan, which includes clear steps for detecting, reporting, and mitigating breaches. |
Third-Party Oversight | |
Vendor contracts | Regular reviews of sub-processor contracts ensure they align with business needs, regulatory requirements, risk management practices, and contractual requirements placed upon processors by Banks. Contracts should be updated where appropriate to ensure compliance with data protection regulations. |
Third-party audits | Auditing third-party data handling practices ensure vendors comply with data protection standards and contractual obligations. |
Data transfers | To manage transfers of personal data to sub-processors outside of the EEA, providers should ensure the appropriate legal measures are in place, such as EU Standard Contractual ClausesStandard Contractual Clauses are legal tools to provide adequate safeguards for data transfers from the EU or the European Economic Area to third countries. (SCCs), UK International Data TransferThe movement of data from one place to another. This could be, for example, from one data controller to another, or from one jurisdiction to another. Agreements, or the EU-US Data Protection Framework. Where appropriate, a Transfer Impact Assessment may need to be conducted. |
Banks are adept at identifying weaknesses in a provider’s data protection framework. Common red flags include:
Robust data protection is essential for payment, insurance, and credit providers seeking to partner with big Banks. Beyond compliance, due diligence can strengthen your organisation and help position you as a trusted partner in the Financial Services sector.
To prepare for due diligence, providers should conduct internal audits to identify gaps in their data protection framework and address common red flags, such as incomplete policies or poor vendor oversight. Consulting with data protection experts can refine processes and help align practices with industry standards.
If your company would benefit from expert data protection advice and guidance, please contact us for more information on how our outsourced services can support your business.
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