Key Difference Between Third-Party Risk and Fourth-Party Risk

To build a robust third-party risk management (TPRM) framework, it’s crucial to understand where your responsibility begins - and where it extends. 

This is where the distinction between third-party risk and fourth-party risk becomes essential, particularly for financial institutions operating under increasing regulatory pressure from bodies like the FCA, PRA, and under DORA guidelines. 

What Is Third-Party Risk?

Third-party risk refers to the exposure that arises from the suppliers, service providers, and contractors your organisation directly engages.

These may include:

• IT and cloud service providers 

• Outsourced customer service teams 

• Marketing or recruitment agencies 

• Consultants or legal advisors 

Because you have a direct contract with these suppliers, your organisation is responsible for conducting due diligence, assessing third-party risk, and ensuring ongoing compliance throughout the supplier lifecycle - all of which sit at the core of an effective TPRM strategy. 

Example: If your bank outsources customer data storage to a cloud provider, and that provider suffers a breach, your organisation could be liable - even though the breach originated externally. 

What Is Fourth-Party Risk?

Fourth-party risk refers to the subcontractors, suppliers, or partners that your third parties rely on to deliver their services to you. You don’t contract with these fourth parties directly, but their failures can still impact your business - especially when they are: 

• Hosting critical infrastructure 

• Processing sensitive customer data 

• Operating in high-risk regions or sectors 

• Subcontracting to unknown or unvetted partners 

This layer of risk is harder to track but is an increasingly critical part of comprehensive 3rd party risk management, and is increasingly scrutinised by regulators. 

Example: Your IT supplier uses a subcontracted data centre in a different jurisdiction. If that centre goes offline, your service is disrupted - and you may not have any direct visibility or control over the incident. 

Why Does This Distinction Matter? 

While most third-party risk management programs focus on direct vendors, fourth-party risk can be a hidden source of systemic vulnerability, especially in complex supply chains.

The financial services sector in particular faces: 

• Shared accountability: Regulators expect oversight beyond direct contracts. 

• Cybersecurity exposure: A weak fourth-party link could be a backdoor to your data. 

• Compliance risk: Unvetted subcontractors could introduce GDPR, DORA, or ESG violations. 

In practice, many third-party failures are triggered by fourth-party issues - making it vital for your TPRM framework to map beyond tier-one suppliers. 

What Happens When Fourth-Party Risk Is Ignored? 

The consequences of fourth-party failure can be just as severe as a direct supplier breach - but without visibility via a third-party risk management framework, it’s often harder to detect and recover from: 

• Operational disruption: If a subcontractor fails, your third party may not be able to deliver - delaying services, halting operations, or impacting customers. 

• Regulatory scrutiny: Financial institutions may face enforcement action for failing to ensure their third parties maintain adequate oversight of their own partners. 

• Data exposure: If a fourth party mishandles sensitive information, your organisation could still be held liable - even if you never knew they were involved. 

• Reputational fallout: Customers and regulators won’t distinguish between third- and fourth-party failures - your brand bears the impact either way. 

• Contractual ambiguity: Without direct agreements in place, recovery or remediation can be slow, expensive, or impossible. 

Example: A payment processing vendor outsources encryption to a fourth party. A flaw in that fourth party’s system causes a breach. Your customer data is compromised, and your organisation must answer to regulators and restore trust - despite never engaging that supplier directly. 

The further removed a supplier is from your oversight, the longer it takes to detect risk and the harder it is to respond. That’s why growing regulatory frameworks - including DORA - are placing more emphasis on supply chain mapping and systemic resilience. 

This is why mature TPRM programs in financial services must expand visibility into fourth-party networks. 

How To Address Fourth-Party Risk  

A mature third-party risk management framework should include: 

• Contractual obligations: Require your third parties to disclose and manage their own supplier risks. 

• Supplier mapping: Ask for visibility into subcontractors and critical dependencies. 

• Shared assurance platforms: Use tools like FSQS to validate not just direct suppliers, but the assurance they provide over their own vendor ecosystem. 

• Monitoring triggers: Flag when a third-party changes providers or expands their subcontractor list. 

By extending your TPRM scope to include fourth parties, you reduce blind spots, strengthen operational resilience, and stay ahead of regulatory expectations. 

Final Thought: You Can't Manage What You Can't See 

In financial services, third-party risk doesn’t stop with the suppliers you choose - it continues with the suppliers they choose too.

The line between third-party risk and fourth-party risk is thin, but the impact is real. 

Understanding the difference - and including both within your third-party risk management framework - helps you reduce risk exposure, avoid regulatory consequences, and protect operational continuity.