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With the coming into force of a comprehensive new package of cyber security legislation over the course of 2018, certain businesses in the financial services industry are now required to ensure they are compliant with new rules and have in place a sufficiently robust cyber security posture.
These requirements apply under the EU Directive on the Security of Network and Information Systems (the “NIS Directive”)(1), which took effect on 9 May 2018, and which was transposed into Irish law by way of the European Union (Measures for a High Common Level of Security of Network and Information Systems) Regulations 2018 (the “2018 Regulations”) in September of the same year. We discuss here the impact of the new regime for in-scope financial service sector operators.
Who needs to comply with the NIS Directive and the 2018 Regulations?
All businesses which fall under the definition of Operators of Essential Services (“OESs”) or Digital Service Providers (“DSPs”) need to comply with the new rules. For a general discussion of the obligations of OESs and DSPs under the new legislation, please see our article “Can we Protect our Businesses from Cyber Threats? New EU Cyber Security Regulations Published”, available here.
OESs are listed in Schedule 1 of the 2018 Regulations, which echoes Annex 1 of the NIS Directive. Sector 3 of Schedule 1 defines companies operating in the “Banking” industry as OESs and Sector 4 of Schedule 1 has the same effect in relation to “Financial market infrastructures.”
Schedule 1 of the 2018 Regulations defines banking businesses by reference to the pre-existing definition of ‘Credit Institutions’ and states that a bank is an “undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account.”
“Financial market infrastructures”, in turn, are defined by the 2018 Regulations as:
- Operators of trading venues (which includes regulated markets, multilateral trading facilities (“MTF”) and organised trading facilities; and
- Central counterparties (“CCPs”) which are defined as “a legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer.”
By way of example, this definition could include the Main Securities Market of the Irish Stock Exchange (“ISE”), the FX MTF operated by Thomson Reuters, as well as EUREX Clearing AG (which acts as the CCP for the Main and Enterprise Securities Markets of the ISE). In principle, the definition could potentially include any crypto exchanges established in Ireland, however the regulatory status of crypto-assets in Ireland has not been fully resolved.
In accordance with Article 5(1) of the NIS Directive, OESs had to be identified by each Member State of the European Union by 9 November 2018. In Ireland, the competent authority in charge of this process for the purposes of relevant financial services providers is the Central Bank of Ireland (“CBI”). Under the terms of the 2018 Regulations, the designation of OESs must be reviewed by the CBI “from time to time and, in any event, not later than 9 November 2020 and, thereafter, not later than every second anniversary of that date.” So far, we are not aware of any cryptocurrency-related companies having been notified. That position will likely change over time. Interestingly, the position in Ireland differs from the UK, where the NIS Directive implementing legislation does not include the banking industry and financial markets infrastructures, on the basis of adequate pre-existing regulation, a position which (amongst other sector exemptions, across a number of Member States) the European Commission has in a report dated October 2019 raised issue with.
What are the obligations?
The obligations on financial services providers which are deemed OESs are the same as those which apply to other types of OESs. More explicitly, they are required to take “appropriate and proportionate technical and organisational measures to manage the risks posed to the security of the network and information systems” under the terms of the NIS Directive and the 2018 Regulations. In addition, OESs must take steps to prevent and minimise the impact of any incident that affects the security of their network and information systems to ensure the continuity of the services they provide.
In accordance with the terms of the NIS Directive, such proportionate technical and organisational measures include:
- The security of systems and facilities;
- Incident handling;
- Business continuity management;
- Monitoring, auditing and testing; and
- Compliance with international standards.
In the event of a relevant financial services provider being the subject of “any incident concerning it that has a significant impact on the continuity of an essential service provided by it in respect of which it is designated as an operator of essential services” there is a requirement to notify the computer security incident response team (“CSIRT”), which is a unit of the Irish Department of Communications, Climate Action and Environment. This requirement also applies in the event that a DSP, which the relevant financial services provider is relying on for the provision of its service, is affected by an incident which has a significant impact on the continuity of the essential service provided by the financial services provider. This would include many providers and cloud-based services, which increasingly underpin the operations of the financial services sector operators. We discuss the various categories of DSPs in a previous article, available here. Thus, there is an element here of reaching into the OES supply chain.
Notifications of incidents to the CSIRT, as well as notifications of the resolution of incidents, need to be made within 72 hours after becoming aware of them. The CSIRT may decide to inform the public where it considers this to be necessary in the circumstances and in particular where there is a risk that other businesses, which are either considered to be OESs or DSPs, will be the subject of the same or similar type of incident.
Possible consequences of failure to comply
Apart from negative publicity resulting from cyber security incidents being made public by the CSIRT, the 2018 Regulations provide for various criminal offences that companies or their officers may be guilty of. Such offences are punishable on summary conviction to a fine of €5,000 or on conviction on indictment to maximum fines ranging from €50,000 (in the case of an individual) to €500,000 (in the case of a company). Furthermore, persons convicted of an offence will be required to pay the prosecutor a sum equal to the costs and expenses reasonably incurred in prosecuting the offence, unless there are “special and substantial reasons” why this should not be the case. These fines are not amongst the highest implemented across the Member States’ local implementing legislation, but the fact of criminal prosecution is a serious matter for any corporation and especially a financial services entity.
As stated previously, under the 2018 Regulations it is an offence to fail to notify the CSIRT of a reportable incident or resolution of such incident. Further, it is an offence to fail to comply with a request, instruction, or direction from an authorised officer in the exercise of their functions. Where a person has been served with a compliance notice and fails to abide by same, or causes or permits another person to contravene the terms of the notice, they are also committing an offence.
It is noteworthy that any offence committed by a company, which was committed with the consent or connivance of a director or other officer, or where a director or officer has been acting with wilful neglect, that person as well as the company are guilty of an offence and may be prosecuted. A personal prosecution would be a serious matter for an individual, including with respect to reputation and any applicable fit-and-proper type regulated entity requirements.
As fintech start-ups are increasingly moving into the space traditionally occupied by high street banks and other established players, they too will need to be in a position to comply with the terms of the NIS Directive and the 2018 Regulations. In particular given the frequency of cyber-attacks on cryptocurrency exchanges, such as the Korean website Bithumb which lost $31 million in a hacking incident in the summer of 2018, it is clear that emerging financial service providers are as in need of as robust a cyber security posture as the more traditional players in this arena. In some ways, new market entrants have the advantage over longer established financial services sector operators of (often) single purpose market offerings, coherent IT infrastructure and the ability when compiling its IT infrastructure to build in a form of security-by-design.
With the provisions of the NIS Directive and 2018 Regulations now in full force and effect, businesses need to make sure they are in compliance with the terms of both. Protocols need to be in place to deal with events that have a significant impact on the continuity of the essential service provided by them. This is all the more important for those businesses operating in the financial services sector due to the already stringent regulation in this area and a high level of public and media scrutiny.
(1) Directive (EU) 2016/1148.
(2) S.I. No. 360 of 2018.
(3) As defined in Article 4(1) of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms.
(4) Within the meaning of Regulation 3(1) of the European Union (Markets in Financial Instruments) Regulations 2017 (S.I. No. 375 of 2017).
(5) As defined in Article 2(1) of Regulation (EU) NO 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.
(6) See: https://ec.europa.eu/digital-single-market/en/news/report-assessing-consistency-approaches-identification-operators-essential-services
The authors wish to thank Max Riegel for his contribution to this article.
This briefing was first published on Global Assets, November 2019.Download PDF