Navigating the Digital Operational Resilience Act

Catherine Castaldo, Christian Leuthner and Asélle Ibraimova break down DORA, the Digital Operational Resilience Act, which is new legislation that aims to enhance the cybersecurity and resilience of the financial sector in the European Union. DORA sets out common standards and requirements for these entities so they can identify, prevent, mitigate and respond to cyber threats and incidents as well as ensure business continuity and operational resilience. The team discusses the implications of DORA and offers insights on applicability, obligations and potential liability for noncompliance.

This episode was recorded on 17 January 2025.

Transcript: 

Intro: Hello, and welcome to Tech Law Talks, a podcast brought to you by Reed Smith's Emerging Technologies Group. In each episode of this podcast, we will discuss cutting-edge issues on technology, data, and the law. We will provide practical observations on a wide variety of technology and data topics to give you quick and actionable tips to address the issues you are dealing with every day. 

Catherine: Hi, everyone. I'm Catherine Castaldo, a partner in the New York office of Reed Smith, and I'm in the EmTech Group. And I'm here today with my colleagues, Christian and Asélle, who I'll introduce themselves. And we're going to talk to you about DORA. Go ahead, Christian. Christian: Hi, I'm Christian Leuthner. I'm a Reed Smith partner in the Frankfurt office, focusing on IT and data protection law. 

Asélle: And I'm Asélle Ibraimova. I am a council based in London. And I'm also part of the EmTech group, focusing on tech, data, and cybersecurity. 

Catherine: Great. Thanks, Asélle and Christian. Today, when we're recording this, January 17th, 2025, is the effective date of this new regulation, commonly referred to as DORA. For those less familiar, would you tell us what DORA stands for and who is subject to it? Christian: Yeah, sure. So DORA stands for the Digital Operational Resilience Act, which is a new regulation that aims to enhance the cybersecurity and resilience of the financial sector in the European Union. It applies to a wide range of financial entities, such as banks, insurance companies, investment firms, payment service providers, crypto asset service providers, and even to critical third-party providers that offer services to the financial sector. DORA sets out common standards and requirements for these entities to identify, prevent, mitigate, and respond to cyber threats and incidents as well, as to ensure business continuity and operational resilience.

 Catherine: Oh, that's comprehensive. Is there any entity who needs to be more concerned about it than others, or is it equally applicable to all of the ones you listed? 

Asélle: I can jump in here. So DORA is a piece of legislation that wants to respect proportionality and allow organizations to deal with DORA requirements that will be proportionate to their size, to the nature of the cybersecurity risks. So, for example, micro-enterprises or certain financial entities that have only a small number of members will have a simplified ICT risk management framework under DORA. I also wanted to mention that DORA applies to financial entities that are outside of the EU, but provide services in the EU so they will be caught. And maybe just to also add in terms of the risks. It's not only the size of the financial entities that matter in terms of how they comply with the requirements of DORA, but also the cybersecurity risk. So let's say an ICT third-party service provider, the risk of that entity will depend on the nature of that service, on the complexity, on whether that service supports critical or important function of the financial entity, generally dependence on ICT service provider and ultimately on its potential to disrupt the services of that financial entity. 

Catherine: So some of our friends might just be learning about this by listening to the podcast. So what does ICT stand for, Asélle? 

Asélle: It is informational communication technology. So in other words, it's anything that a financial entity receives as a service or a product digitally. It also covers ICT services provided by a financial entity. So, for example, if a financial entity offers a platform for fund or investment management or a piece of software or its custodian services are provided digitally, those services will also be considered an ICT service. And those financial entities will need to cover their customer-facing contracts as well and make sure DORA requirements are covered in the contracts. 

Catherine: Thank you for that. What are some of the risks for noncompliance? Christian: The risks for noncompliance with DORA are significant and could entail both financial and reputational consequences. First of all, DORA empowers the authorities to impose administrative sanctions and corrective measures on entities that breach its provisions. Which could range from warnings and reprimands to fines and penalties to withdrawals of authorization and licenses, which could have significant impact on the business of all the entities. The level of sanctions and measures will depend on the nature, gravity and duration of the breach, as well as on the entity's cooperation and remediation efforts. So better be positive to help the authority in case they identify the breach. Second, non-compliance with DORA could also expose entities to legal actions and claims from the customers, investors, or other parties that might suffer losses or damages as a result of cyber incident or disruption of service. And third, non-compliance with DORA could also damage the entity's reputation and trustworthiness in the market and affect its competitive advantage and customer loyalty. Therefore, entities should take DORA seriously and ensure that they comply with its requirements and expectations. 

Catherine: If I haven't been able to start considering DORA, and I think it might be applicable to me, where should I start? 

Asélle: It's actually a very interesting question. So from our experience. We see large financial entities such as banks, etc. Look at this comprehensively. Comprehensively, obviously, all financial entities had quite a long time to prepare, but large organizations seem to look at it more comprehensively and have done the proper assessment of whether or not their services are caught. But we are still getting quite a few questions in terms of whether or not DORA applies to a certain financial entity type. So I think there are quite a few organizations out there who are still trying to determine that. But once that's clear although DORA itself is quite a long kind of piece of legislation, in actual fact, it is further clarified in various regulatory technical standards and implementing technical standards, and they clarify all of the cybersecurity requirements that actually appear quite generic in DORA itself. So those RTS and ITS are quite lengthy documents and are all together around 1,000 pages. So that's where kind of the devil is in the detail there and organizations will find it may appear quite overwhelming. So I would start by assessing whether DORA applies, which services, which entities, which geographies. Once that's determined, it's important to identify whether financial entities' own services may be deemed ICT services, as I just explained earlier. The next step in my mind would be to check whether the services that are caught also support critical or important functions, and also when kind of making registries of third party ICT service providers, also making sure, kind of identifying those separately. And the reason is quite a few of the requirements, additional requirements applied to critical and important functions. For example, the incident reporting obligations and requirements in terms of contractual agreements. And then I would look at updating contracts, first of all, with important ICT service providers, then also checking if customer-facing contracts need to be updated if the financial entity is providing ICT services itself. And also not forgetting the intra-group ICT agreements where, for example, a parent company is providing data storage or word processing services to its affiliates in Europe. So they should be covered as well. 

Catherine: If we were a smaller company or a company that interacts in the financial services sector, can we think of an example that might be helpful for people listening on how I could start? Maybe what's the example of a smaller or middle-sized company that would be subject to this? And then who would they be interacting with on the ICT side? 

Asélle: Maybe an example of that could be an investment fund or a pensions provider. I think most of this compliance effort when it comes to DORA will be driven by in-house cybersecurity teams. So they will be updating their risk management and risk frameworks. But any updates to policies, whenever they have to be looked at, I think will need to be reviewed by legal and incident reporting policies, contract management policies, I don't think they depend on size. If there are ICT service providers supporting critical or important functions, additional requirements will apply regardless of whether you're a small or a large organization. It's just the measures will depend on what level of risk, say, certain ICT service provider presents. So if this internal cybersecurity team has kind of put, you know, all the risk, all the IST assets in buckets and all the third-party IST services in various buckets based on criticality, then that would make the job of legal and generally compliance much easier. However, what we're seeing right now is that all of that work is happening all at the same time in parallel as people are rushing to get compliance. So that will mean that there may be gaps and inconsistencies and I'm sure they can be patched later. 

Catherine: Thank you for that. So just another follow-up question, maybe Christian can respond, would my data center contract be subject to DORA regulations if I was a financial services entity? Christian: It's worth to look into that and see if it's an ICT provider that you use to provide your services. So I'm pretty sure you need to look into that and see if you can implement at least the contractual requirements that arise from DORA. 

Asélle: I would just add to support Christian's response and say that the definition of ICT services is quite broad and covers digital and data services provided through ICT systems. So, I mean, as you can see, it's just so generic and I'm pretty sure it would cover data centers, but I guess not directly because say a financial entity was receiving a service of a cloud service provider, then data centers are probably a second or third kind of level subcontractor. And unfortunately, or fortunately, DORA has very detailed requirements in terms of subcontracting and the obligations don't stop at a certain level. Therefore, data centers are likely to be caught somehow and will be receiving DORA addenda to their contracts. 

Catherine: Thank you for that clarification. I was, like probably many people have tried to digest this regulation, a little confused on how broad the coverage for information and communication technology went. But that's very helpful then, I'm sure. Any final thoughts? 

Asélle: We are helping a few organizations and learning a lot as we work with them. And the legislation is pretty complex and requires in-house teams to work together as well. And Christian and I would be very happy to assist and navigate this complex framework. Christian: And if you haven't started yet, of course, it's a huge regulation. There's so many requirements to tackle, but there's one day you have to start. So then start today, look into it, and implement the requirements that arise from DORA. 

Catherine: Well, thank you so much, Christian and Asélle, and everybody, as we said before, we're talking about DORA today, because today, January 17th, is the day that it becomes effective. So if, like Christian said, you haven't started, today's a good day to start. And I'm sure you can reach out to one of my colleagues to get some assistance. Thanks for joining. Christian: Thanks for having us, Catherine. 

Asélle: It was a pleasure. Thank you. 

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