Third-party partnerships are critical to delivering efficient and innovative services in today’s digital economy. But with that dependence comes a complicated cocktail of risks, threatening operational resilience – especially for financial firms, where one weak link can seriously cause havoc on essential services.
The EU is no stranger to this, announcing the Digital Operational Resilience Act – otherwise known as DORA – which raises the bar on risk key assessments and third-party obligations. A systematic, continuous third-party risk management focus lies at the heart of DORA’s vision of digital resilience. It sets out new rules and requirements that financial entities and ICT service providers need to follow. With financial firms so reliant on third-party partnerships, these dependencies pose significant risks. To address this, the EU introduced DORA – an initiative designed to set strict requirements aimed at ensuring critical third-party risks are effectively managed. Accordingly, DORA requires financial entities to continuously monitor third-party ICT risks, enforce minimum controls, and directly oversee critical service providers.
In this article, we explore how DORA – the new standard for a secure, digital financial sector of the future – complements existing third-party risk management practices, enhancing ICT resilience and establishing a collective baseline for securing the digital landscape of European finance.
DORA at a Glance: Operating with Resilience in Today’s Digital-First World
DORA compliance aims to guarantee that financial institutions can withstand, respond and recover from all relevant ICT disturbances. Third-party ICT risk management is fundamental to DORA, requiring institutions to go beyond simply assessing risks and take a step further by adopting a robust ICT infrastructure across their vendor ecosystems. With DORA, third-party risk management is no longer a reactive approach but rather becomes proactive, focusing on securing critical functions and ensuring uninterrupted business operations.
The Next Evolution in Risk Assessments
DORA revolutionizes the approach to risk assessments by implementing structured, continuous, and contextual methods, setting a higher standard for businesses to achieve excellence in resilience.
Here’s how DORA is reshaping risk assessments and third-party obligations:
Risk Assessments Contextualized
DORA also requires financial entities to undertake detailed risk assessments, identifying the risks that apply to both the operational environment and dependencies of each organization, which will differ from one vendor to another. A risk assessment with DORA goes beyond compliance, and it isn’t just a simple checklist to be filled out – rather it is an exercise that requires organizations to work through third-party services that are integral to core business operations.
By focusing only on near-cloud solutions, businesses face the risk of gaining a limited view of all potential cloud-related risks. It is, therefore, vital for organizations to assess risks according to their entire ICT landscape, considering key factors such as their dependency on cloud providers – whether direct or indirect – geographical risk factors, as well as the nature of the vendor relationships.
Continuous and Dynamic Risk Monitoring
Given the fast-evolving digital environment, DORA recognizes that static risk assessments are simply not enough. Instead, it places ICT risk management at the core of its compliance requirements by encouraging the integration of ICT-specific risk analysis into its consolidated risk methodologies. As a result, financial institutions must implement continuous monitoring processes to regularly evaluate the security posture of their third-party vendors.
These continuous monitoring activities may include regular security assessments, vulnerability scanning and key risk indicators (KRIs) to help identify changes in third-party risks. This approach complements DORA’s push for instantaneous resiliency, enabling firms to detect weaknesses early on and take corrective action right away.
Establishing a Resilient ICT Risk Management Framework
DORA has made ICT risk management more central to its compliance requirements, urging companies to integrate it seamlessly into their broader risk strategies. It expands the focus beyond simply overseeing third-party vendors’ ICT security and resilience, emphasizing the need for those vendors to meet minimum standards in cybersecurity, data protection, and resilience. This comprehensive approach redefines ICT risk as a key component of overall operational resilience, helping organizations identify, diagnose, and mitigate risks that could disrupt essential services.
Standardizing Third-Party Risk Management
Through DORA, the EU has established set rules for managing third-party risks in the financial sector, requiring in-depth vendor risk assessments and oversight. Financial institutions should treat cybersecurity as part of the broader risk profile when reviewing third parties, evaluating their data security practices as well as their incident detection and response capabilities.
Additionally, DORA requires relevant contracts with critical third-party ICT service providers to lay out transparent terms regarding access to data, monitoring of risks, and procedures for recovery from an incident or any disruptions.
Stress Testing and Incident Response Plans
DORA mandates that financial institutions carry out regular stress testing of the resilience of their most critical functions, including outsourcing necessary arrangements. Stress testing involves simulating certain scenarios – such as cyberattacks or disruptions caused by security threats – to assess whether an organization can continue providing services when it has been disrupted in some way. This practice is all the more relevant when evaluating risks associated with third-party providers. Additionally, DORA requires organizations to establish clear incident response plans to effectively respond to, recover from, and learn from ICT incidents, including those impacting third-party services.
Scrutiny Over Critical Third-Party Providers
A distinguishing feature of DORA is that it creates direct regulatory supervision over key third-party providers, including cloud service providers – a level of oversight never before seen or required in the financial sector. DORA sets resilience requirements for critical ICT providers designated for this exact purpose, subjecting them to regular audits and regulatory surveillance. This direct oversight ensures that both financial institutions and their providers comply with regulatory standards, reducing systemic risk within the sector.
GET DORA COMPLIANT 90% FASTER
The Broader Impact of DORA on the Financial Sector and Beyond
DORA raises the bar for digital resilience, representing a significant shift from the long-standing principles that have guided third-party relationships and operational risk management. By requiring financial institutions and their key ICT providers to adhere to clear, robust rules, DORA helps foster trust within the digital ecosystem and strengthens operational resilience.
Depending on the type of organization, this more comprehensive and continuous approach to third-party risk management translates into a stronger focus on vendor due diligence, ongoing monitoring, and the integration of ICT risk into overall enterprise strategies. Even if your business operates outside the financial sector, DORA serves as a valuable framework for strengthening all of your own third-party relationships. As resilience and preparedness increasingly become universal best practices, DORA’s principles offer insights that are relevant across a wide range of industries.
Ultimately, the extensive risk evaluations and third-party responsibilities mandated by DORA lay the foundation for a resilient financial ecosystem that can thrive under the demands of a global digital landscape. When organizations are willing to embrace these principles and adapt them to their needs, they not only enhance their own business stability but also contribute to making the broader network of interconnected services and systems that underpin today’s business environment resilient.
