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In the ever-changing landscape of the financial sector, the Digital Operational Resilience Act (DORA) represents a significant regulatory development aimed at strengthening the resilience of digital systems within the sector. Effective contract management is a key strategy for meeting these new requirements. This article serves as an introduction to the importance of contract management for DORA compliance and provides a guide for financial firms to strategically prepare for it.
The meaning of DORA
DORA sets comprehensive rules for financial service providers in the EU to strengthen their digital operational and security systems. The regulations aim to ensure market integrity and consumer protection in an increasingly digitalized world. This requires companies to revise their IT risk management practices, conduct comprehensive security audits, and implement mechanisms to quickly recover from IT failures.
Who are affected by DORA regulations?
DORA is aimed at a wide range of players in the financial sector, including banks, insurance companies, investment firms, payment service providers, and crypto asset service providers. Critical IT service providers who provide essential services to these financial companies are also subject to the regulations.
The role of contract management
Strategic contract management plays a central role in ensuring compliance with DORA. It enables companies to accurately assess and manage the risks arising from their digital operations and reliance on third-party providers. By implementing an effective contract management system, financial services providers can ensure that all contracts with IT service providers, cloud providers, and other partners are thoroughly reviewed to ensure compliance with DORA requirements.
Timetable for implementing DORA regulations
The DORA regulations came into force on January 16, 2023, with a transition period until January 17, 2025, giving companies time to make the necessary adjustments to be fully compliant.
DORA requirements for financial service providers
“Financial service providers must ensure operational resilience, ICT incidence management, resilience testing, third-party management, and information sharing under DORA to effectively manage digital risks. ”
The Digital Operational Resilience Act (DORA) is a fundamental initiative of the European Union aimed at strengthening the resilience and security of digital systems in the financial sector. With the introduction of DORA, financial service providers are facing new challenges and requirements, which are structured by five central pillars:
1. Operational Resilience and Risk Management
Financial services providers must establish comprehensive risk management processes that focus on identifying, evaluating, monitoring, and mitigating digital risks. This includes the development of a strategic risk strategy that takes into account both current and potential future risks arising from digital transformation and the use of ICT.
2. Managing ICT Incidents and Cyber Security
Effective mechanisms for managing ICT security incidents are required, including an incident response plan. Significant security incidents must be reported to the relevant authorities within a specified time frame. It is also essential to develop and implement appropriate security policies and procedures to protect information systems and data.
3. Digital Operational Resilience Testing
Regular tests of digital resilience are necessary to evaluate the effectiveness of the implemented protective measures and to identify weak points. This includes penetration tests, scenario analyses, and other resilience tests that check how companies are prepared for potential cyber attacks and IT failures.
4. Third party governance and management
With increasing reliance on third parties, companies must ensure that these partners meet the same high standards of digital resilience. This requires careful management and monitoring of relationships with third-party providers to adequately manage associated risks.
5. Exchange of information
Effective sharing of information about threats, vulnerabilities, and incidents is critical to improve the financial sector's collective understanding and ability to respond to cyber threats. Financial services providers should put in place mechanisms to share relevant information both internally and with other stakeholders, including regulators.
By implementing these pillars, financial service providers can not only ensure compliance with DORA regulations, but also improve their overall digital operational resilience. This contributes to the stability of the entire financial system. The exact implementation of these requirements may vary, depending on the size, type and complexity of the institution, using the principle of proportionality.
Implementing these requirements requires comprehensive strategic planning and commitment at all levels of the financial institution. By integrating an effective contract management system, financial institutions can not only ensure compliance with DORA but also improve their overall digital resilience and security.
The importance of DORA in the context of increasing third-party usage
In the financial world, awareness of the risks that can arise from the involvement of third-party providers is growing. It is virtually impossible to completely avoid these risks, as cooperation with third parties is often essential. Instead, the focus is on identifying, managing, and mitigating these risks. The trend is moving away from pure risk identification towards active risk management and mitigation.
Many organizations rely on traditional methods, such as email questionnaires and manually updated spreadsheets, to monitor third-party providers. However, there is an increasing trend towards a centralized, data-driven approach. This enables in-depth risk analysis and supports strategic decisions in risk management through automation and the use of real-time data. A study by E&Y shows that 90% of respondents are investing in improving their third-party risk management (TPRM) programs.
According to PwC's “Global FinTech Report 2023" study, 82% of financial service providers plan to increase their reliance on third-party providers in the next few years, and 64% see managing third-party risks as a key issue in the industry. The EY study “Third-party risk management in financial services” adds that 70% of financial service providers have already had incidents with third-party providers caused by lack of due diligence, inadequate contracts, ineffective controls and lack of communication.
These findings underline the importance of strategic contract management to comply with DORA guidelines. Effective contract management systems enable financial companies to accurately assess, manage, and mitigate risks associated with third-party providers. By implementing such systems, financial service providers can ensure that all contracts meet DORA requirements and thus strengthen their digital resilience.
Preparation steps
Careful preparation is essential to effectively meet DORA requirements and ensure robust digital resilience. This starts with a thorough review of existing contract management practices and extends to targeted employee training. Here are a few basic steps that companies should consider as part of their preparation strategy:
- Assessment of the current situation: Organizations should start with a comprehensive assessment of their current contract management practices to identify existing gaps with DORA requirements.
- Development of an action plan: Based on the assessment, detailed plans should be developed to adapt internal processes, security measures and governance structures.
- Implementation of contract management solutions: The introduction or improvement of a contract management system is crucial to maintain an overview of all contracts and to effectively assess and manage risks.
- Training and awareness raising: Employees should be trained on the importance of DORA and the role of contract management.
Assisted by contract management software to meet DORA requirements
Contract management software provides a comprehensive solution to help financial institutions meet DORA requirements. By automating and centralizing contract management, such systems can significantly contribute to digital resilience and compliance:
- Risk management: Contract management software can automate the identification and assessment of risks arising from contracts and third-party relationships. By providing detailed insights into contract terms and clauses, the software enables precise risk analysis and promotes proactive control measures.
- Incident Management: The software can serve as a central platform for recording and managing IT security incidents. It enables rapid documentation and reporting of incidents to the relevant authorities, as required by DORA. It can also help track actions to resolve and prevent incidents.
- Digital operational resilience testing: Contract management software can help organize the planning and execution of resilience tests. It helps manage test plans, results, and follow-up measures to ensure that all digital systems and processes are regularly tested for resilience.
- Management of third-party risks: The software makes it easy to carefully select and continuously evaluate third parties. By centrally managing contracts and service agreements, financial institutions can ensure that their partners comply with the required security and resilience standards.
- ICT and security management: Contract management software helps document and manage security policies set out in contracts with IT service providers and other partners. This ensures that all external and internal activities comply with established security requirements.
- Training and awareness raising: The software can also be used to disseminate training materials and guidelines to promote awareness and understanding of digital risks and DORA requirements among employees.
Overall, contract management software provides financial institutions with the necessary tools to effectively manage DORA's complex requirements. By automating critical processes and providing real-time data, the software significantly contributes to strengthening digital resilience and promoting a culture of compliance in the financial sector.
