Understanding the Cyber Resilience Act

On September 15, 2022, the European Commission presented the Cyber Resilience Act, an ambitious effort to standardise cyber security regulations for digitally enabled products. The CRA aims to accomplish the following by establishing a uniform baseline for cyber resilience:

1. Strengthen security for all digital products: Many digital products now available on the market lack proper security features, making them vulnerable to exploitation. For example, smart home devices such as connected thermostats or security cameras can be particularly susceptible to cyber attacks if not properly secured. To address this, the CRA requires secure development techniques, vulnerability management, and security standards at every stage of a product’s lifespan.
2. Empowering customers and companies to make informed decisions: The cyber security aspects of digital products are often not prominently featured, making it difficult for consumers to assess their risks. The CRA helps both businesses and consumers make informed choices by requiring greater transparency regarding these products’ cyber security features.

The CRA sets mandatory cyber security standards for digital goods producers, distributors, and operators to accomplish these objectives.

Timeline and Important Compliance Checkpoints

Businesses should be aware of the following significant dates and milestones as the CRA moves through the EU legislative process:

• Political Agreement: After several revisions and stakeholder engagements, the European Commission reached a political agreement on the CRA on December 1, 2023. This agreement shows broad support for the CRA’s goals.
• Compliance Window: Following legislation, companies will have specific deadlines to comply:
  – 21 Months: To fulfil the CRA’s event and vulnerability reporting obligations.
  – 36 months: To ensure complete adherence to all CRA regulations, particularly those about EU certification, secure development procedures, and transparency.

Businesses may organise compliance activities using this staged timeframe, but early action is essential to prevent disruptions.

Implications for Businesses Across Sectors

The CRA impacts various businesses that deploy digital products, with software and hardware developers likely to be the most directly affected. The CRA’s provisions also extend beyond the European Union, meaning that non-EU companies that offer digital products or services within the EU market must also comply with the CRA’s requirements. This means that any business, regardless of its location, must ensure its products meet the CRA’s cyber security standards if they are to be used within the EU. The following summarises the potential effects of the CRA on different business types:

1. Vendors of digital services and technology providers

The CRA places strict standards on businesses that create software or offer digital services, including secure development, vulnerability management, and regular updates. Technology providers must prioritise vulnerability reporting and implement secure coding practices to reduce security risks across widely used platforms and applications.

2. Manufacturers of IoT devices and hardware

Security elements must be incorporated into the design and development stages for manufacturers of digitally integrated hardware, including Internet of Things (IoT) devices. These companies might be scrutinised, primarily if they produce “high-risk” goods affecting public safety, healthcare, or vital infrastructure. The CRA may also require hardware modifications to guarantee safe, future-proof goods that meet EU standards.

3. Distributors and Retailers of Digital Goods

Distributors and retailers contribute to cyber security by ensuring their goods meet CRA regulations. They must also enable traceability, keep up-to-date records of cyber security features, and inform customers about the security characteristics of their products.

4. Healthcare Providers and Critical Infrastructure

Cyber threats can target organisations that oversee vital infrastructure, including transportation, healthcare, and energy. The CRA establishes a requirement for strict incident response procedures and monitoring of real-time cyber security metrics for these industries.

5. SMEs (small and medium-sized enterprises)

Despite the CRA’s broad applicability, SMEs may encounter difficulties because of limited resources. The CRA encourages SMEs to implement basic security procedures that improve resilience without putting an undue financial burden on them.

How to Prepare for CRA Compliance

As the CRA and associated implementation guidance develops, businesses have an opportunity to take the initiative in aligning their operations, services and products with the requirements of the Act.

Ryan Hides outlines his top 5 key areas of focus for businesses to ensure they’re CRA-ready:

1. Risk Management and Assessment

Conduct thorough risk assessments to identify potential vulnerabilities in your systems and processes. Implement robust risk management strategies to mitigate identified risks and ensure continuous monitoring to adapt to new threats. The CRA requires that manufacturers incorporate security measures from the design and development phases to ensure products have fewer vulnerabilities

2. Data Protection and Privacy

Ensure that all data, especially personal and sensitive information, is adequately protected. Implement strong encryption methods, access controls, and regular audits to comply with data protection regulations and safeguard against breaches.

3. Incident Response Planning

Develop and maintain a comprehensive incident response plan. This should include clear procedures for detecting, reporting, and responding to cyber incidents. Regularly test and update the plan to ensure it remains effective against evolving threats.

4. Employee Training and Awareness

Invest in regular training programs to educate employees about cyber security best practices and the importance of compliance. Foster a culture of security awareness to reduce the risk of human error and insider threats.

5. Vendor and Third-Party Management

Evaluate and manage the cyber security practices of vendors and third-party partners. Ensure they comply with CRA standards and integrate their security measures into your overall cyber security framework to prevent supply chain vulnerabilities.

The outlook for cyber resilience and the CRA

The Cyber Resilience Act is a proactive step towards creating a more secure digital future for the EU. In addition to avoiding fines, CRA compliance helps businesses build consumer trust, improve brand reputation, and lower cyber risk.

Compliance with the CRA sets the foundation for a resilient future in which security is integral to every digital product and service offered within the EU.

The Oversight Framework for ICT Third-Party Providers

Chapter 5 of the DORA Act is dedicated to the establishment of an oversight framework for critical ICT third-party service providers. These providers, which supply essential services to financial institutions, play a vital role in the sector’s digital infrastructure. Given their importance, the DORA Act mandates that these third-party providers are subject to strict oversight to ensure they adhere to the necessary security and resilience standards.

Key Provisions:

1. Oversight Authority: Chapter 5 empowers designated oversight authorities to monitor and assess the activities of critical ICT third-party providers. These authorities are responsible for ensuring that these providers comply with the same operational resilience standards required of financial entities.
2. Risk Management Requirements: Third-party providers must implement robust risk management practices. This includes identifying and mitigating potential risks that could impact the services they provide to financial entities. The providers are expected to have security measures that are at least equivalent to those of the financial entities they serve.
3. Right to Audit: Financial entities are granted the right to audit their critical ICT third-party providers. This provision ensures that financial entities can verify that the third-party providers are meeting the required standards. The audits can include reviewing security controls, resilience measures, and any incidents that may have affected service delivery.
4. Self-Assessments: ICT third-party providers are required to conduct regular self-assessments of their security and resilience measures. These self-assessments help in identifying any gaps or weaknesses in their systems, allowing them to take proactive steps to address these issues.
5. Audit Reports: Financial entities can request audit reports from their ICT third-party providers, including SOC II Type 2 reports and Information Security Management System (ISMS) Statements of Applicability (SoA). These reports provide an in-depth look at the provider’s controls and practices, giving financial entities greater assurance of their reliability.
6. Enforcement and Penalties: The oversight authorities are empowered to take enforcement actions if third-party providers fail to meet the required standards. This can include penalties, restrictions on services, or other measures designed to protect the integrity of the financial sector.

Practical Implications for Businesses: Managing Third-Party ICT Risk

The requirements outlined in Chapter 5 have far-reaching implications for both financial entities and their ICT third-party providers. The chapter’s focus on third-party risk management underscores the importance of ensuring that external service providers are as secure and resilient as the financial institutions they support.

1. Strengthening Third-Party Risk Management:

Financial institutions must enhance their third-party risk management strategies to comply with Chapter 5. This involves not only selecting ICT service providers that meet high standards of security and resilience but also continuously monitoring and assessing these providers. Regular audits and assessments become essential tools in this process, allowing financial entities to verify that their providers are maintaining the required standards.

2. Ensuring Compliance through Audits:

The right to audit, as granted under Chapter 5, is a powerful tool for financial entities. By conducting audits, financial institutions can gain direct insights into the security and operational practices of their ICT third-party providers. These audits should be thorough, covering all aspects of the provider’s operations that could impact the financial entity. This includes reviewing security controls, incident response plans, and business continuity measures.

3. Leveraging Self-Assessments and Audit Reports:

ICT third-party providers are expected to conduct regular self-assessments and provide detailed audit reports upon request. Financial entities should actively seek these reports, as they offer valuable information on the provider’s adherence to security and resilience standards. Specifically, SOC II Type 2 reports and ISMS SoA documents are crucial as they outline the provider’s control environment and how it aligns with industry standards.

4. Enhancing Governance and Oversight:

For financial entities, Chapter 5 emphasises the need for strong governance over third-party relationships. Senior management and boards of directors must be involved in overseeing third-party risk management activities. This includes reviewing audit findings, assessing the effectiveness of third-party controls, and ensuring that any identified risks are promptly addressed.

5. Preparing for Regulatory Scrutiny:

Given the oversight powers granted to regulatory authorities under Chapter 5, both financial entities and their ICT third-party providers must be prepared for potential scrutiny. This includes having all necessary documentation and evidence of compliance readily available. Providers should be ready to demonstrate their adherence to the required standards, while financial entities must ensure they have conducted sufficient due diligence on their providers.

Steps to Ensure Compliance with Chapter 5

To effectively meet the requirements of Chapter 5, financial entities should consider the following steps:

1. Understand the Criteria: The European Supervisory Authorities (ESAs) have specified criteria for designating ICT third-party service providers as critical, which includes: systemic impact of a failure; the importance of the functions supported; and the number of important institutions relying on the provider.
2. Gain assurance from ICT third-party providers: Financial entities must ensure that their ICT third-party providers comply with DORA’s requirements. This includes managing ICT risks, ensuring continuity and recovery, and reporting incidents2.
3. Consider Oversight Fees: The ESAs have also proposed oversight fees for critical ICT third-party providers, which are calculated based on the turnover of the critical ICT third-party service provider. These fees cover the costs of monitoring and ensuring compliance.

Overview

Chapter 4 of DORA mandates that financial entities establish and maintain robust ICT risk management frameworks. These frameworks should be integrated into the overall risk management system of the entity and should address all ICT-related risks comprehensively. The chapter outlines several key components that these frameworks must encompass:

1. Governance and Organisational Structure
2. ICT Risk Management Process
3. Information Security Requirements
4. ICT Incident Management, Classification, and Reporting
5. Digital Operational Resilience Testing
6. Management of ICT Third-Party Risk

Each of these components is designed to ensure a comprehensive approach to managing ICT risks, emphasising both preventative and reactive measures.

Governance and Organisational Structure

Implication: Financial entities must have a clear governance and organisational framework where ICT risk management is integrated at all levels in the organisation. This includes assigning specific roles and responsibilities for ICT risk management.

CRMG Recommendation: Effective governance and organisational structure are interdependent. A well-defined organisational structure supports good governance by providing assurance that roles and responsibilities have been clarified, ensuring accountability, and providing the most effective environment for effective decision-making.

ICT Risk Management Process

Implication: Entities need to identify, assess, monitor, and manage ICT risks continuously. This requires a systematic process that is well-documented and regularly reviewed.

CRMG Recommendation: Implementing a consistent approach to ICT risk management throughout the organisation, especially one that directly links threats to controls, will enable the organisation to understand, prioritise and address the relevant ICT risks.

Information Security Requirements

Implication: Ensuring the confidentiality, integrity, and availability of information and ICT systems is crucial. This includes implementing robust cyber security measures and maintaining a secure ICT environment.

CRMG Recommendation:  By focusing on these three attributes of information when implementing cyber security measures, organisations are in a better position to protect their data from unauthorised access, fraud, and also ensure it is available when required.

ICT Incident Management, Classification, and Reporting

Implication: Financial entities must have procedures to detect, manage, and report ICT incidents promptly. This includes classifying incidents based on their severity and impact.

CRMG Recommendation: Detecting potential incidents early, and prioritising responses so that the most critical incidents receive immediate attention are techniques that will help organisations utilise their resources to deal with ICT incidents as efficiently as possible.

Digital Operational Resilience Testing

Implication: Entities are required to perform regular resilience testing to ensure their ICT systems can survive various types of disruptions. This includes vulnerability assessments, penetration testing, and other forms of resilience testing.

CRMG Recommendation:  Regular resilience testing includes a wide range of techniques such as Disaster Recovery Testing, Load Testing, Failover Testing and Incident Response Testing. Threat-Led Penetration Testing (TLPT) is a particular area of focus under DORA as certain financial entities are required to conduct TLPT at least every three years to ensure their ICT systems can withstand sophisticated cyber threats.

Management of ICT Third-Party Risk

Implication: Managing risks associated with third-party ICT service providers is critical. Financial entities must ensure that their third-party providers adhere to the same high standards of ICT risk management as their own.

CRMG Recommendation: Third parties and the contracting financial entity must work very closely together to ensure the requirements of DORA are met and that all information for the Lead Overseer is available when they conduct off-site investigations, on-site inspections, and continuous monitoring.

By mandating standardised procedures and regular assessments, DORA aims to enhance the overall resilience of the financial sector against digital threats. Chapter 4 of DORA provides a comprehensive framework for managing ICT risks in the financial sector.

The practical implications and recommendations discussed in this article aim to guide financial entities in implementing effective ICT risk management frameworks, ensuring not only compliance with DORA but also the security and stability of their operations in an increasingly digital world.