As federally regulated financial institutions (FRFIs) expand their reliance on technology, employ progressively complicated and interconnected networks and systems, increase their electronic service offerings and collaborate with technology service providers, cybersecurity has become a constant source of concern for FRFIs, as well as their regulators. To safeguard against the potentially far-reaching damage a breach of cybersecurity could inflict upon Canada’s financial sector, the Office of the Superintendent of Financial Institutions (OSFI) has gradually incorporated cybersecurity into its ongoing supervision of risk, often by relying on FRFIs to take the initiative with limited regulator guidance.
2012: OVERSIGHT OF TECHNOLOGY-BASED OUTSOURCING SERVICES
In February 2012, OSFI released a memorandum (2012 Memorandum) reminding FRFIs that the expectations contained in OSFI Guideline B-10: Outsourcing of Business Activities, Functions and Processes (Guideline B-10) “remain current and continue to apply” in respect of technology-based outsourcing services such as cloud computing. The 2012 Memorandum also emphasizes the importance of FRFIs considering their ability to meet the expectations of Guideline B-10 in respect of material technology-based outsourcing arrangements, with an emphasis on: confidentiality, security and separation of property; contingency planning; location of records; access and audit rights; subcontracting; and monitoring.
Although the 2012 Memorandum does not use the phrase “cybersecurity”, it confirms that any risks associated with outsourcing technology-based services are within the scope of OSFI’s existing outsourcing risk management expectations. Rather than targeting particular technologies, developing specific technology guidance or mandating compliance with specific standards (which was not done in Guideline B-10 or the 2012 Memorandum), OSFI relies on the judgment of individual FRFIs to apply existing guidance and risk management principles to technology and cyber risks faced by the FRFI. While this approach allows OSFI to avoid propagating over (or under) inclusive standards that rapidly become obsolete as technology evolves, it can often leave FRFIs unclear as to OSFI’s expectations.
2013: CYBERSECURITY SELF-ASSESSMENT
Recognizing the growth in the frequency and sophistication of cyber-attacks and the elevated risk profile resulting from it, in May 2013, OSFI identified cybersecurity as a priority in its Plan and Priorities for 2013-2016, stating that over the next three years OSFI would increase its resources in the area of operational risk to enable it to conduct more reviews of FRFIs and specifically target “technology risk with a focus on cybersecurity; quality of data systems; and overall management of rising operational risk.” OSFI also advised that it would raise the bar for operational risk units at FRFIs, expecting them to strengthen their best practices. Among other things, OSFI proposed to conduct a targeted cross-sector review of technology risk at major FRFIs with a view to identifying gaps so that practices could be enhanced.
Later that year, OSFI released the Cybersecurity Self-Assessment Guidance (Self-Assessment). By setting out “desirable properties and characteristics of cybersecurity practices”, the Self-Assessment is designed to assist FRFIs in assessing their level of preparedness and developing and maintaining effective cybersecurity practices. The Self-Assessment template identifies six broad areas in respect of which FRFIs can rate their current level of maturity on a scale of one to four, with a rating of one signifying a practice that is not yet implemented and a rating of four signifying that the practice and related principles are fully implemented across the entire enterprise. In particular, FRFIs are asked to rate themselves in respect of the following:
- Organization and Resources: The criteria relate to the FRFI’s establishment of accountability and ownership of, and financial resources for: its cybersecurity framework, the FRFI’s organizational structures and capabilities for managing cybersecurity, and cybersecurity employee training and awareness.
- Cyber Risk and Control Assessment: The criteria relate to the FRFI’s processes for assessing cyber risk across all business lines and geographies; the assessment and mitigation of cyber risk arising from material outsourcing arrangements and critical IT service providers; the consideration of cyber risk in change management processes and due diligence processes; security testing of IT assets, infrastructure and network systems; conduct of cyber-attack and recovery simulations; and impact assessment of extended, nationwide Internet outages.
- Situational Awareness: The criteria relate to the FRFI having enterprise-wide knowledge of its users, devices, applications and their relationships; central storage of historical security event information; analysis of security event information; monitoring and tracking cybersecurity incidents in the industry and more broadly; and subscribing to industry research on cybersecurity.
- Threat and Vulnerability Risk Management: The criteria relate to the FRFI’s implementation of tools and controls for data loss detection/prevention and cyber incident detection and mitigation; the FRFI’s implementation of security-related processes and controls for software, network infrastructure, configuration management, and network access and management; the FRFI’s management of cybersecurity risk in material outsourcing arrangements and arrangements with critical IT service providers through due diligence; and provision of cybersecurity awareness and information to customers and clients and taking additional actions to protect customers and clients.
- Cybersecurity Incident Management: The criteria relate to the FRFI’s incident management framework and associated processes and procedures (including change management processes, incident escalation protocols and communications protocols) and their ability to support rapid response to cybersecurity incidents, as well as to support service recovery, systems integrity and loss or recovery of data and post-incident review of cybersecurity incidents.
- Cybersecurity Governance: The criteria are divided into five subcategories. The first category relates to the FRFI’s establishment of an enterprise-wide cybersecurity policy that is linked to other relevant risk management policies, as well as the establishment of a cybersecurity strategy (and implementation plan) that is aligned with the FRFI’s business plan. The second category relates to the FRFI’s risk management approach to cybersecurity risk. The third category relates to the FRFI’s internal audit practices as they relate to cybersecurity. The fourth category relates to the participation and role of FRFI’s senior management and board in addressing cyber risk and implementing the FRFI’s cybersecurity framework. The fifth and final category relates to the FRFI conducting an external benchmarking review of its cybersecurity framework.
In line with its prior approach, OSFI stated that it did “not... plan to establish specific guidance for control and management of cyber risk”, but would potentially request that FRFIs complete the otherwise voluntary Self-Assessment and “emphasize cybersecurity practices during future supervisory assessments.” OSFI has not established additional specific guidance on the topic of cyber risk, nor has OSFI modified the initial Self-Assessment template since 2013.
2014 AND 2015: PRIORITIZING CYBERSECURITY
Since 2013, OSFI has continued to identify cybersecurity as a key risk in its Reports on Plans and Priorities. In the reports published in 2014 and 2015, OSFI identified cybersecurity and outsourcing risk as operational risks, and in 2015 planned to pursue certain mitigation efforts to reduce risk exposure in respect of cybersecurity. OSFI stated that it intends to enhance supervisory processes through the following activities:
- ?Monitoring federal cybersecurity legislation to ensure coordination with OSFI’s activities in this area
- Monitoring and following-up on FRFIs’ responses to the Self-Assessment (i.e. adherence to their response plan)
- Following-up on distributed denial-of-service preparedness, cybersecurity, IT governance and risk management reviews
OSFI also proposed to pursue any gaps identified in the course of monitoring compliance.
COMING UP: INTEGRATING CYBERSECURITY IN OPERATIONAL RISK MANAGEMENT
Earlier this year, OSFI released Draft Guideline E-21: Operational Risk Management (Draft Guideline) for comments. In its draft form, the Draft Guideline did not specifically identify cybersecurity or technology matters, but operational risk is defined broadly as “the risk of loss resulting from people, inadequate or failed internal processes and systems, or from external events”, which can easily be applicable to cybersecurity and technology risks. As discussed in our August 2015 Blakes Bulletin: What Does Operational Risk Management Draft Guideline Mean for Federally Regulated Financial Institutions?, once the Draft Guidance is finalized, OSFI will expect all FRFIs (other than branch operations of foreign banks and foreign insurance companies) to establish and maintain an enterprise-wide framework of operational risk management controls, informed by four guiding principles. In particular:
- ?Operational risk management should be fully integrated within the FRFI’s overall risk management program and appropriately documented.
- Operational risk management should serve to support the overall corporate governance structure of the FRFI. As part of this, FRFIs should develop and utilize an operational risk appetite statement as a component of the board-approved risk appetite framework described in OSFI’s Corporate Governance Guideline. The operational risk statement should regularly be reviewed by the FRFI’s board and senior management.
- FRFIs should ensure effective accountability for operational risk management. A “three lines of defence” approach or appropriately robust structure serves to separate the key practices of operational risk management and provide adequate independent overview and challenge. How this is operationalized in practice in terms of the organizational structure of a FRFI will depend on its business model and risk profile.
- FRFIs should ensure comprehensive identification and assessment of operational risk through the use of appropriate management tools. Maintaining a suite of operational risk management tools provides a mechanism for collecting and communicating relevant operational risk information within the FRFI and to relevant supervisory authorities.
Like the Self-Assessment, the principles-based nature of the Draft Guideline aims to promote standards without prescribing how they are to be achieved. In several respects, the Self-Assessment complements the Draft Guideline. The cybersecurity Governance criteria in the Self-Assessment align with the three lines of defence set out in the Draft Guideline. Both expect FRFIs to implement a system of escalating supervision over risk, including internal auditing and independent reviews on evaluating the respective risk management frameworks. To the extent the Self-Assessment offers more detail regarding the elements that comprise the different levels of defence, FRFIs can use their responses to the Self-Assessment to inform their operational risk management frameworks once the Draft Guideline is in final form. The comment period ended on October 9, 2015, and it remains to be seen whether OSFI will entertain significant changes to the Draft Guideline.