When organisations implement an information security programme, one of two lenses usually steers the direction of focus – compliance or risk.

Most businesses will consider both compliance and risk, with the focus largely determined by the sector operated in and the extent to which the organisation is regulated.

For example, a retail business might well focus its efforts on the measures required to be PCI-DSS compliant, while an insurance company is likely to focus heavily on data protection.

But regardless of compliance requirements, it’s important to overlay the lens of risk to ensure that cyber security efforts ultimately address the organisation’s own cyber threat profile and deliver fit-for-purpose business resilience.

Understanding the difference between risk and compliance

Taking a risk-based approach to information security is all about identifying the specific cyber threats the organisation faces and the areas of the business where a successful attack would have the greatest impact.

From this understanding, resources can be assigned to protect the confidentiality, integrity and availability of the company’s digital assets through a range of controls.

A risk-based approach allows the organisation to do this efficiently and cost-effectively, with the greatest areas of risk being given the most resources.

On the other hand, information security compliance is about ensuring that legal obligations, requirements and standards are met to prevent negative consequences such as legal challenges, fines and lost customers.

These standards often come from a range of areas including government, industry, financial institutions and sometimes even partners and customers. In most cases, there is a lot of overlap and cybersecurity is just one part of a wider set of standards to be met.

For smaller businesses, compliance-centric practices can be more pragmatic at first

For small to medium-sized enterprises, the scales usually fall in favour of compliance, at least initially. For example, as a supplier looking to grow its customer base and win new business, the need to become ISO 27001 compliant is becoming increasingly common.

Without this certification, some organisations simply won’t work with the third-party provider as it has the potential to negatively impact their cybersecurity resilience.

Smaller organisations don’t always have the internal expertise or maturity to implement information security from scratch without support, so a standard framework of requirements can act as useful scaffolding for a growing information security function.

For larger or enterprise-level organisations that have already taken the compliance approach, refocusing on risk can be hugely beneficial.

Of the two approaches, it is the one that best acknowledges the organisation’s context, aligning with day-to-day operations to mitigate the potential impact of threats.

For example, the organisation might operate in an industry that is highly exposed to DDoS attacks. This would create the need to divert more resources to this area and to mitigate the potential impact of a successful attack than it does to protect against phishing, which could pose a lower risk when accounting for industry context.

Why we always advocate addressing risk in information security

CRMG always recommends that organisations consider risk when it comes to information security. This is because you are far more likely to mitigate risks by directly addressing them than by merely going through the tick-box exercise of information security compliance.

However, to do this effectively, the security leader within the company must also be a realist – the organisation must have an appetite and/or the resources to implement a risk-based approach. If it doesn’t, compliance is likely to be the primary area of focus until it does.

For most organisations, there will be a need to combine both approaches. For example, they may be required to implement certain protocols by the government of the country they operate in, with standards also set by the financial institutions they work with. However, this should be augmented with a tailored risk-based approach where at all possible.

In reality, a pragmatic approach is best. Ultimately, it’s important to not lose sight of wider business goals, and this is where taking a risk-based approach will – by definition – keep you on track.

CRMG is highly experienced when it comes to supporting businesses in combining both risk and compliance approaches to information security. If you’d like to know more about how we can assist your organisation, contact a member of the team via the below.

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.