In the digital economy, firms increasingly rely on technology to conduct business with customers and to provide services. Nowhere has this reliance been more pronounced than in the financial sector, where a whole range of things from bank transfers to insurance claims are conducted through the Internet.
With the increasing dependence on technology, the threat of an IT failure, cyberattack, and system failure increases correspondingly. The European Union, as this bloc has recognized the potential threats arising from digitalization, introduced the Digital Operational Resilience Act (DORA) and promised to improve operational resilience in the financial sector.
This is a blog on DORA regulation, why it was established, and how companies can move with regulations to ensure their digital operations are strong, safe, and ready for any possible disturbances.
What is DORA Regulation?
DORA is an acronym for the Digital Operational Resilience Act, but what is dora regulation? Dora regulation is a regulatory framework that was developed by the European Union to make critical financial institutions and their related counterparties able to better withstand and recover from IT disruptions.
Improved corporate operational resilience on the part of companies in this niche develops as a result of this risk, mitigating risks resulting from cyberattacks, system outages, and other ICT failures.
According to the DORA, credit institutions, such as banks and insurance firms, investment firms, as well as third-party IT providers are obliged to comply with standardized procedures for managing ICT risks to prevent potential disruptions of ICT.
The DORA sets strict requirements on ICT risk management, testing of operational resilience, and reporting of significant incidents to the relevant regulatory authorities.
DORA should thus standardize the management of ICT risks for financial institutions within the EU in such a way that equips the industry to face burgeoning risks from technological disruptions.
Why DORA?
In brief, the finance industry has accelerated the transformation by embracing cutting-edge technology and digital innovations. However, this transformation came with quite big challenges, such as cybercrime, along with increasing dependency on third-party IT service providers. The following are some of the main factors that led to the introduction of DORA:
For one, cyber threat rises have placed the regulators and financial institutions on high alert. Because hackers put them against such a high-profile status, it is easy to strike at financial institutions. In particular, breaches can affect the entire ecosystem of businesses and customers.
Massive cyberattacks, data breaches, and IT outages in the last few years have proven that the sector is highly vulnerable to digital threats. DORA came forth to respond to these risks by standardizing how financial institutions answer such incidents and recover from them.
That is, before DORA, there were no harmonized regulations and standards applicable to ICT risk management in the financial sector across the EU’s member states. This led to confusion and complications for financial institutions operating across multiple countries as they navigated different compliance rules.
Who is Covered Under DORA?
DORA applies broadly to the financial sector and its connected entities. It covers not only the more traditional financial institutions but also the digital service providers as well as third-party vendors. The key entities subject to DORA are:
- Both digital and traditional banks
- Insurance companies
- Payment service providers
- Investment firms, brokers
- Credit rating agencies
- Financial market infrastructures like exchanges and clearing houses
- Third-party ICT service providers
The massive scale of DORA’s application manifests that the requirement of a resilient digital ecosystem needs to be in all sectors involved with financial transactions and data processing.
Key Elements of DORA
In terms of operational resilience, DORA highlights some explicit regulatory requirements that businesses have to meet to become aligned with the regulation. So, businesses trying to meet the regulations must understand these components.
ICT Risk Management Framework
One of the main aspects of DORA is that businesses should have a successful ICT risk management framework for identifying, evaluating, and managing ICT-related risks. Organizations should institute procedures to prevent, monitor, and mitigate all types of risk.
Time-to-time assessments of systems and processes help maintain pace with new emerging risks, otherwise, just new ways of cyberattacks or emerging vulnerabilities in digital structures and infrastructures.
Companies are designed to conduct high-level risk assessments that involve identifying possible threats and vulnerabilities usually found in their ICT systems. Afterward, the organization should implement prevention strategies like firewalls, encryption, and installation of antivirus software, among others, to ensure protection for its systems.
The company should also be positioned with strong detection mechanisms ensuring alertness of cyber incidents as they occur, and there should be response plans to guide the handling of disruptions.
Incident Reporting
DORA also addresses incident reporting. In the event of material ICT-related disruption, financial institutions should report to the relevant regulatory authorities. This would allow supervisors to monitor systemic risks and act accordingly should systemic threats be identified.
This means that just reporting incidents is not good enough. Incidents and responses should be analyzed to learn from previous experiences in order to better prepare for potential crises in the future.
Testing Operational Resilience
Businesses regulated under DORA are supposed to conduct continuous testing on operational resilience. Stress testing ICT systems seek to have the systems stand in a strong position against different kinds of disturbances, such as cyberattacks and hardware failure.
Other organizations will be expected to perform Threat-Led Penetration Testing (TLPT): Here, ethical hackers simulate attacks to determine the weaknesses of the system.
These tests prepare the organization to face real disruptions by identifying and closing vulnerabilities before they are exploited. Testing is a never-ending process since there are always new threats and evolution of systems over time.
Third-Party Risk Management
Given the enormous dependence on third-party ICT service providers, DORA mandates that financial firms exercise utmost care in managing their relationships with vendors. Third-party risk management involves evaluating the resilience of such providers and ensuring that they have in place comparable security and resilience controls.
It is a prerequisite to enter a contract with third-party vendors so that the resilience of those vendors can be tested during operation, data protection, and incidents that might have occurred.
The institutions will need to examine the criticality of the third-party services, identify backup providers to the extent possible, and ensure provisions for continued service during disruption are in place through contracts.
Impact on Businesses by DORA
DORA imposes a range of compliance obligations on businesses in the financial industry. However, these regulatory measures also bring important operational resilience benefits.
For one, DORA compliance will give businesses enhanced cybersecurity. Installation of the risk management frameworks and the resilience tests espoused by DORA will better secure the institutions against a myriad variety of cyber attacks. Not experiencing devastating breaches and disruptions is a valuable threat only if it positively affects the conduct of the business.
Also, DORA compliance ensures business continuity. When prepared with a plan for ICT incidents, businesses are bound to recover more quickly from one disruption with services available for customers, bringing reliability and trust from the customers and preventing reputational damage.
Steps for DORA Compliance
The ICT risk management process needs to be systematized to comply with DORA.
- Review Existing Risks in ICT: The existing risks in ICT need to be reviewed very carefully, taking into consideration the kind of vulnerabilities involved in it for cybersecurity attacks, system performance, and third-party providers.
- Strong Framework Establishment: Develop an ICT risk management framework that satisfies compliance requirements with DORA. Risk identification, prevention, and mitigation procedures should also be documented.
- Resilience Testing: Regularly carry out resilience tests which should include such tests as stress testing as well as penetration testing to ensure that your systems can withstand interruptions.
- Incident reporting: Establish clear incident reporting protocol of ICT incidents between competent authorities, and ensure that all employees clearly know their place in the reporting procedure.
- Review of Third-Party Contracts: Review your contracts with service providers of your ICTs against the operational resilience requirements of DORA. Your contract should provide for periodic testing, incident reporting, and data protection.
- Keep on Top of Updates: Keep track of updates or guidance from the EU regulatory bodies about DORA. This will keep you up-to-date on the emergence of new risks and regulations.
Conclusion
DORA serves as one the most important critical regulatory frameworks to meet the increasing cybersecurity and system failure threats towards the digital operations of the financial sector. The businesses surely then undertake serious efforts with DORA in compliance for their greater resilience by not disrupting essential services.
For financial institutions and related companies, compliance with DORA is a matter of lasting resilience and competitive advantage in a necessarily more digital world. Preparations today will ensure that businesses, their customers, and the financial ecosystem in general are protected tomorrow.
FAQs
- Who has to comply with regulation DORA?
A financial institution that encompasses banks, insurance companies, investment firms, and third-party IT service providers must be compliant with DORA.
- What is the purpose of DORA?
The DORA aims to enhance the resilience of information technologies by financial institutions to resist any form of disruption or cyberattacks.
- How does DORA impact third-party service providers?
DORA makes it necessary for financial institutions to have quality control of third-party providers’ effective risk management, making it feasible for the third-party providers to have matched resilience and security standards.