UK: Bank And FCA Up The Ante On Operational Resilience Expectations

The Bank of England (BoE) and the Financial Conduct Authority (FCA) have released a Discussion Paper (DP) on operational resilience, introducing enhanced expectations for Boards and senior management. The DP emphasises incident recovery – using the concept of "impact tolerance" – and highlights the regulators' focus on the ability of firms and FMIs (collectively "firms") to resume critical business services. The DP is of primary interest to CROs, COOs, CISOs, heads of operational resilience or cyber risk and Board members at financial services firms regulated by the BoE, FCA or Prudential Regulation Authority (PRA).

The DP gives a very important indication of how the thinking of UK regulators has evolved on matters such as cyber risk. It takes a broad view of the kind of incidents firms may face, and accepts that some disruptions are inevitable. In effect, if implemented, this approach asks firms to prepare for and demonstrate their resilience to a much larger range of operational scenarios, including ones that may arise in third parties that they outsource any systems or processes to. 

This approach will push firms to prioritise and invest in areas that allow them to recover their business services after a severe disruption, and also to continue to improve the capabilities that help them maintain continuity of service through more minor incidents. For some firms this may become a significant factor in how they evaluate decisions about systems' enhancement and replacement.

Impact tolerance is an important concept in the DP. In essence, it is an upper limit for the impact to business services that a firm is prepared to tolerate as a result of a "severe but plausible" operational disruption. It is expected to be set by the Boards and senior management of firms and expressed as a set of specific metrics on the duration, volume or nature of a disruption. This is a more advanced approach than recovery time objectives (RTOs) and one that takes into account the severity of a disruption and the number of customers or stakeholders affected. In practice firms may decide to adopt a "twin-track" approach to operational resilience. First, while continuing to prevent minor disruptions is important, firms should accept that minor disruptions will happen. Our view is that in such circumstances the regulators expect greater focus on planning for maintaining continuity of business services. Second, by applying concepts such as impact tolerance (similar to the concepts of Maximum Acceptable Outage and maximum Period of Tolerable Disruption defined in ISO 22301), the regulators believe firms will be able to make better informed decisions on investment in resilience and, more importantly, be able to prioritise the recovery of the most important business systems in more severe scenarios.

THE SUPERVISORY APPROACH TO OPERATIONAL RESILIENCE

In publishing the DP, the BoE and FCA have emphasised a number of key messages, which summarise the approach they envision:

  1. Operational resilience is best managed by focusing on the delivery of business services, rather than on systems and processes. This includes an expectation that firms should prioritise their most important business services and be able to identify the systems and processes that support them, whether internally to the organisation or if outsourced to a third party.
  2. The UK Financial Policy Committee (FPC) intends to set its own impact tolerance for operational disruptions to "vital services" that the financial system provides to the economy. The FPC's intention is to avoid disruptions that would cause "material economic impact". The practical implication of this is likely to be a more prescriptive supervisory approach to impact tolerance for larger or systemically important firms.
  3. Boards and senior management need to take more direct responsibility for the operational resilience of their firms and should be central to the process of setting impact tolerances and identifying which business services are prioritised. The DP notes a range of existing regulatory powers supporting this outcome, including the introduction of a Senior Management Function for internal operations and technology (SMF 24).
  4. Firms should focus on improving communications during disruptions, particularly those affecting the customer-oriented services they provide. Noting recent high-profile disruptions in the financial services sector, the DP highlights the growing role supervisors could play in assessing the speed and effectiveness of both external and internal communications plans that firms have in place to respond to operational failures.
  5. Firms will need to articulate impact tolerances for their business services based on clear metrics and outcomes, setting a target for how they expect to recover from a severe but plausible disruption. These impact tolerances will be relevant to the systems supporting business services, including any systems that are maintained or provided by third parties. The DP does recognise, however, that firms may sometimes not be able to meet these recovery expectations in the event of an extreme disruption scenario.
  6. Supervisors will assess the operational resilience of firms using a number of tools, including through the use of stress tests, as announced by the FPC in its June Financial Stability Report. The DP also notes that supervisors will assess the impact tolerances set by firms, request changes be made to them, and may consider setting their own impact tolerances where they deem necessary.

WHAT TO EXPECT NEXT

It is important to note that the DP does not put in place any immediate rule changes or new supervisory procedures, but is rather meant to solicit feedback from the industry on how upcoming rules should be designed and implemented.

Nevertheless, these messages represent an important initial step in what we expect to be an area of significant supervisory activity on the part of the UK authorities in the coming months. The FPC has committed to providing further detail on its 2019 cyber risk stress-testing programme by Q4 2018, and the BoE and FCA will spend this time analysing feedback received and further developing the concepts in this paper.

For impact tolerance, in particular, we see a number of critical decisions that the authorities must make as they put this concept into practice; namely, how prescriptive the FPC wishes to be in setting impact tolerances for systemically-important firms; and, identifying the type of "severe but plausible" scenarios that they will expect firms to plan to be able to recover from.

Feedback on the DP is encouraged by the BoE and FCA, who are particularly interested in hearing more about existing metrics that firms use to benchmark their recovery from operational disruptions. The DP is open for comment until 5 October 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions