Tough new EU cyber rules require banks to ramp up security — but many aren’t ready

Tough new European Union regulations requiring banks to bolster their cybersecurity systems officially come into effect Friday — but many of the bloc’s financial services firms aren’t yet in full compliance with the rules.

The EU’s Digital Operational Resilience Act, or DORA, requires both financial services firms and their technology suppliers to strengthen their IT systems to ensure the industry is resilient in the event of a cyberattack or any other forms of disruption. It entered into effect on Jan. 17.

The penalties for breaches of the new legislation can be substantial. Financial services firms that fall foul of the new rules can face fines of up to 2% of annual global revenue. Individual managers could also be held liable for breaches and face sanctions of as much as 1 million euros ($1 million).

So far, the rate of compliance among financial services firms with the new rules has been mixed, according to Harvey Jang, chief privacy officer and deputy general counsel at IT giant Cisco.

“I think we’ve seen a mixed bag,” Jang told CNBC in an interview. “Of course, the more mature-stage companies are further along looking at this for at least a year — if not longer.”

“We’re really trying to build this compliance program, but it’s so complex. I think that’s the challenge. We saw this too with GDPR and other broad legislation that is subject to interpretation — what does it actually mean to comply? It means different things to different people,” he said.

This lack of a common understanding of what qualifies as robust compliance with DORA has in turn led many institutions to ramp up security standards to the level that they’re actually surpassing the “baseline” of what’s expected of most firms, Jang added.

Under DORA, financial firms will be required to undertake rigorous IT risk and incident management, classification and reporting, operational resilience testing, intelligence sharing on cyber threats and vulnerabilities, and measures to manage third-party risks.

Firms will be also be required to conduct assessments of “concentration risk” related to the outsourcing of critical or important operational functions to external companies.

A Censuswide survey of 200 U.K. chief information security officers commissioned by Orange Cyberdefense, the cybersecurity division of French telecoms firm Orange, showed that 43% of financial institutions in Britain aren’t yet in full compliance with DORA.

That’s a concern because, even though the U.K. falls outside the European Union now, DORA applies to all financial entities operating within EU jurisdictions — even if they’re based outside the bloc.

“Whilst it is clear that DORA has no legal reach in the U.K., entities based here and operating or providing services to entities in the EU will be subject to the regulation,” Richard Lindsay, principal advisory consultant at Orange Cyberdefense, told CNBC.

He added that the main challenge for many financial institutions when it comes to achieving DORA compliance has been managing their critical third-party IT providers.

“Financial institutions operate within a multi-layered and hugely complex digital ecosystem,” Lindsay said. “Tracking and ensuring that all parts of this system evidentially comply with the relevant elements of DORA will require a new mindset, solutions and resources.”

Banks are also adding higher levels of scrutiny in their contract negotiations with tech suppliers due to DORA’s strict requirements, Jang said.

The Cisco chief privacy officer told CNBC that he thinks there is alignment when it comes to the principles and the spirit of the law. However, he added, “any legislation is a product of compromise and so, as they get more prescriptive, then it becomes challenging.”

“The principles we agree with, but any legislation is a product of compromise, and so as as they get more prescriptive, then it becomes challenging.”

Still, despite the challenges, the broad expectation among experts is that it won’t be long until banks and other financial institutions achieve compliance.

“Banks in Europe already comply with significant regulations which cover the majority of the areas that fall under DORA,” Fabio Colombo, EMEA financial services security lead at Accenture, told CNBC.

“As a result, financial services institutions already have mature governance and compliance capabilities in place, with existing incident reporting processes and solid ICT risk frameworks.”

IT providers can also be fined under DORA. The rules threaten levies of as much as 1% of average daily worldwide revenue for up to six months.

“These sanctions are necessary,” Brian Fox, chief technology officer of software supply chain management firm Sonatype, told CNBC. “They are a powerful motivator, pushing leaders to take compliance and operational resilience more seriously than ever.”

Orange Cyberdefense’s Lindsay said there’s a risk longer term that financial services firms end up moving their critical security functions and services in-house.

“Advances in technology may allow financial institutions to move services back in-house, simplifying this aspect and reducing the risk of non-compliance,” he said.

“Either way, existing contracts will need to be updated to ensure compliance is contractually mandated and monitored between entity and provider,” Lindsay added.

Meanwhile, there are several other cybersecurity-focused regulations that organizations will have to come to terms, such as the Network and Information Security Directive 2, or NIS 2, and the Cyber Resilient Act. The former entered into force in October.

“As with any new regulation, there will certainly be a transitionary period as organisations adjust to new requirements and standards,” Sonatype’s Fox told CNBC. “This is the start of a long journey toward improving software security and resilience.”