Cloud computing has grown significantly in the last few years. A Gartner Executive Program survey of more than 2,000 Chief Information Officers (CIOs), representing 50 countries and 38 industries, found that cloud computing is the number one technology priority for 2011. Fully 43% of the CIOs expected that a majority of their IT will be running “in the cloud” within four years. In its updated June 2011 forecast of Information Technology spending, Gartner stated that cloud computing expenditures are likely to rise by 16-20% per year through 2015, representing 4% of global IT spending by the end of that period. Richard Gordon, research vice president at Gartner, noted that expenditures for cloud computing services grew four times faster than overall IT spending.

What is Cloud Computing?

The term "cloud computing" has been used to refer to almost anything from the ability to access virtual servers over the Internet to the consumption of any information technology service situated outside an organization's infrastructure. The more precise technical meaning, however, is expressed in the following draft definition published by the U.S. Government's National Institute of Standards and Technology:

[A] model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.

As this suggests, the key feature of cloud computing is the ability to access a remote, shared IT infrastructure on an as-needed basis. 

Benefits of Cloud Computing

There are many benefits of cloud computing, including that organizations that use cloud computing are not required to maintain their own localized infrastructures to support the services; rather, they pay for the use of technology resources only when and to the extent that they actually need them. As a result, users can avoid the expense of setting up and looking after in-house infrastructure. Among other things, this allows organizations to replace up-front capital expenditures with a more fluid operational expenditure that more closely tracks actual business activity. Further, because cloud computing services are available to multiple users leveraging the same infrastructure, the cloud service provider is typically able to achieve significant economies of scale, producing additional savings for its customers.

Federally Regulated Entities under OSFI Guideline B-10

Guideline B-10 of the Office of the Superintendent of Financial Institutions (Canada) (OSFI) governs cloud computing arrangements (and other outsourcing agreements) entered into by Federally Regulated Entities (FREs).  For the purposes of the Guideline, the term "FRE" encompasses all Canadian banks, insurance companies, fraternal benefit societies, trust and loan companies and cooperative credit associations and Canadian branches of foreign banks and insurance companies.

Guideline B-10 imposes overall accountability and control requirements, and requires an assessment of the materiality of an outsourcing arrangement and the implementation of a risk management program (the scope and nature of which will vary depending on the materiality of the outsourcing arrangement in question).

B-10 and Cloud Computing

Many of the issues that cloud computing raises for FREs are not unique to cloud computing; they exist in the context of any outsourcing. Nevertheless, cloud computing involves a host of inherent risks, including the use of shared resources; the use of multiple dynamic data transfer routes (to minimize bandwidth usage); dependency on a commoditized, non-customized, volume-based solution; and the use of infrastructure scattered over multiple locations (often in low-cost centres with minimal legislative data protection obligations). The significance of the issues involved in cloud computing will largely depend on the materiality and nature of the services obtained. It would be prudent for FREs to consider the following issues in connection with the development of their cloud computing strategies:

  1. Data commingling and segregation The use of shared virtual infrastructure may create data commingling and segregation issues. B-10 requires service providers to be capable of isolating an FRE's data, records and items in process from those of other customers at all times. As a precondition of entering into a cloud computing arrangement which is subject to B-10, an FRE must therefore determine whether the cloud service provider can offer the service in a manner that permits proper data segregation.
  2. Accessibility of confidential information The nature of cloud computing - including the ability for multiple entities to access shared resources and the use of multiple locations across low cost regions - can create data security and privacy issues. B-10 requires the FRE to ensure that security and confidentiality policies of the cloud computing service provider are commensurate with those of the FRE, which should ensure that all necessary protections are in place to secure the confidentiality of the data provided to the cloud infrastructure. In particular, contractual provisions should clearly define who has responsibility for protection mechanisms, the information that is covered by such protections, the ability of either party to modify security procedures and requirements and notification obligations of the cloud service provider should any confidentiality or security breach occur.
  3. Business continuity The FRE's business continuity plans must address all reasonably foreseeable situations in which a cloud service provider may be unable to continue to provide services at the required levels. Most importantly, in the context of any business interruption affecting the cloud service provider, the FRE should ensure that it has access to all necessary records to allow it to continue its business operations and meet any statutory obligations or other obligations to OSFI.
  4. Data location A cloud service provider's infrastructure and software may be dispersed across multiple locations across the globe. This may be problematic for FREs since B-10 requires the contract governing the provision of the cloud services to identify the nature and scope of the services, including specification of the physical location where the services are being provided. While this may be possible at the outset of a cloud computing arrangement, the dynamic nature of cloud computing means that regular updates should be contemplated under the contract in order to address any shift in the location of the information technology infrastructure supporting the services. In addition, contractual provisions to address any deficiencies in legislated privacy protections and issues relating to access rights of foreign governments and their regulatory agencies should be considered. 
  5. Subcontractors Many cloud service providers enter into subcontracts for additional virtual technology infrastructure on an as-needed basis. FREs need to ensure that subcontracting limitations are imposed to ensure that all such subcontractors are subject to the same security, confidentiality and audit obligations as the cloud service provider. 
  6. Monitoring cloud arrangements The nature of cloud computing can make monitoring and auditing the arrangements difficult. B-10 requires that the FRE be able to monitor the services to ensure that they are being delivered in accordance with the FRE's requirements. The FRE must be capable of evaluating the cloud service provider from time to time, including its internal controls (which may be satisfied through the provision of a SAS70 or analogous control report). The FRE must carefully consider how best to ensure that the necessary monitoring can occur, based on the service model and geographic territory of the services being provided, as well as on the level of monitoring required (given the risks presented by the cloud computing arrangements in question). 
  7. e-Discovery While not specific to FREs, some thought should be given to the growing need to facilitate e-discovery (the production of electronic data and information required in the "discovery" process that occurs when a lawsuit is initiated). The use of cloud computing could lead to delays and costly efforts to produce relevant materials due to data commingling or data dispersion across locations and/or service providers.

Know the Challenges - Address the Risks

Virtually all organizations' IT business plans include at least some outsourcing of IT functions to third parties. Because cloud computing offers so many advantages, its adoption is, for many companies, a question of "when" rather than "if". Security and other challenges faced by FREs in the context of cloud computing are not unique to FREs, but are more pronounced due to the need to comply with B-10. While in certain contexts the challenges and compromises inherent in cloud computing may preclude its adoption by the FRE, in most cases cloud computing will work well, provided that the FRE carefully considers the relevant issues before entering into any agreements.