EU Legislators Enhance Cybersecurity Regulations: A Deep Dive into the Digital Operational Resilience Act (DORA)
By Michael Pelosi and Emilios Charalambous
In an era marked by rapid technological advancements and increasing cyber threats, the European Union (EU) is stepping up its game in the realm of cybersecurity. Central to these efforts is the Digital Operational Resilience Act (DORA), a significant piece of legislation that aims to bolster the cybersecurity framework for financial entities across the EU. Officially enacted on January 16, 2023, DORA will come into full effect on January 17, 2025, marking a pivotal moment in the regulatory landscape.
Understanding DORA: Objectives and Scope
DORA was conceived with two primary objectives:
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Comprehensive ICT Risk Management: The Act seeks to establish a robust framework for managing Information and Communication Technology (ICT) risks within the financial services sector. This includes a wide array of financial institutions, from traditional banks and investment firms to emerging players like crypto-asset service providers and crowdfunding platforms.
- Harmonization of Regulations: DORA aims to unify the disparate ICT risk management regulations that currently exist across individual EU member states, creating a cohesive regulatory environment that enhances overall resilience.
Key Provisions of DORA
DORA encompasses several critical pillars designed to fortify the cybersecurity posture of financial entities:
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ICT Risk Management Frameworks: Financial institutions are required to develop and implement comprehensive ICT risk management frameworks that align with DORA’s principles and requirements.
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Testing and Reporting: The Act mandates both basic and advanced testing of ICT systems, along with stringent reporting requirements for major ICT-related incidents to the relevant authorities.
- Contractual Provisions: DORA emphasizes the importance of key contractual considerations when engaging with third-party ICT service providers. This includes evaluating risks, ensuring due diligence, and establishing clear exit strategies.
Who is Affected by DORA?
DORA’s reach extends beyond traditional financial institutions. It applies to:
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Financial Entities: All financial institutions operating within the EU, including banks, investment firms, and credit institutions.
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Third-Party Service Providers: Entities that provide ICT systems and services to financial firms, such as cloud service providers and data centers, are also subject to DORA’s requirements.
- Critical Information Services: Firms offering critical third-party information services, including credit rating agencies and data analytics providers, fall under DORA’s purview.
The Importance of Compliance
DORA stands out from many legislative frameworks by incorporating significant penalties for non-compliance. Financial entities that fail to adhere to its provisions could face fines of up to 2% of their total annual global turnover, while individuals may incur fines of up to EUR 1,000,000. The severity of the violation and the level of cooperation with authorities will influence the exact penalties imposed.
Moreover, financial entities that neglect to report major ICT-related incidents or significant cyber threats as mandated by DORA could also face substantial fines. Critical third-party ICT service providers may incur penalties of up to EUR 5,000,000, or EUR 500,000 for individuals, for non-compliance.
Key Considerations for Contracting ICT Services
As outlined in Article 28(4) of DORA, financial entities must undertake several considerations before entering into contracts for ICT services:
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Support for Critical Functions: Assess whether the ICT services will support critical or important functions.
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Supervisory Conditions: Ensure that all supervisory conditions for contracting are met.
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Risk Assessment: Identify and evaluate all relevant risks associated with the contractual arrangement.
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Due Diligence: Conduct thorough due diligence on prospective ICT third-party providers to ensure their suitability.
- Conflict of Interest: Identify and assess any potential conflicts of interest.
These considerations are vital for ensuring that financial entities are fully aware of the risks associated with their contractual relationships.
Exit Strategies and Termination Provisions
DORA also emphasizes the need for clear exit strategies and termination provisions in ICT service contracts. Article 28(7) stipulates that financial entities should have mechanisms in place to terminate contracts under specific circumstances, such as:
- Significant breaches of applicable laws or contractual terms by the ICT provider.
- Identification of circumstances that could adversely affect the performance of the services.
- Evidence of weaknesses in the ICT provider’s risk management practices.
Additionally, Article 28(8) encourages financial entities to develop exit strategies that account for potential risks arising from service failures or disruptions, ensuring continuity of operations and regulatory compliance.
Essential Provisions for Contracts
According to Article 30 of DORA, financial entities should include several key provisions in their contractual arrangements with ICT service providers:
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Comprehensive Descriptions: A clear and complete description of all functions and ICT services to be provided.
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Geographical Considerations: Specification of the locations where services will be provided and where data will be processed.
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Data Access and Recovery: Provisions ensuring access to, recovery of, and return of personal and non-personal data in an accessible format if the ICT provider ceases operations.
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Termination Rights: Clearly defined termination rights and minimum notice periods.
- Transition Periods: Establishment of adequate transition periods to facilitate smooth exits from contractual arrangements.
Staying Ahead in Cybersecurity
DORA is just one of many cybersecurity regulations emerging within the EU. As the regulatory landscape continues to evolve, financial firms must remain vigilant and proactive in staying updated with the latest provisions. Compliance with DORA not only ensures adherence to legal requirements but also fosters a culture of resilience and security within the organization.
In conclusion, as the EU strengthens its cybersecurity framework through initiatives like DORA, financial entities must recognize the importance of robust ICT risk management practices and the implications of non-compliance. By prioritizing cybersecurity and adhering to DORA’s provisions, organizations can safeguard their operations and contribute to a more secure digital landscape.
Michael Pelosi and Emilios Charalambous are lawyers at Elias Neocleous & Co LLC.