A client database has been hacked – and personal details of individuals stolen. It’s every company’s nightmare, and now it’s happened. What steps should the firm take? And who needs to be notified?
In today’s world of cyber risk, a successful attack on a financial services firm’s systems is not a matter of “if”, but rather of “when”. While it makes sense to invest in the best cyberattack deterrence technology, and to put in place preventative policies and procedures, bad things can still happen to good cybersecurity programs. And when they do, it’s the firm’s reputation that is on the line.
Firms need to have a plan of action ready to implement if they are hacked and data is stolen. Like a business continuity strategy, such a plan will help guide individuals as to the actions they should be taking – to limit further damage to systems, to mitigate reputational risk, and to ensure compliance with a growing number of regulatory requirements.
A key part of any plan must be managing the notification requirements. Firms usually will need to notify a regulator or other government body that it has been hacked. Sometimes there is also a requirement to notify impacted clients too – but if there isn’t, it is usually best practice to make them aware in any case. Failure to report a cyber breach to either a government body or to clients – if the breach comes to light later – can have a serious negative impact on a firm’s reputation. The internet is littered with companies who delayed reporting and have encountered supervisory censure as well as negative headlines and client lawsuits – Equifax is a recent example.
Many jurisdictions are putting formal notification requirements in place. For example, New York State’s March 2017 regulations now require financial services firms to notify the regulator within 72 hours of a breach taking place, and other US states are putting in place similar requirements. The US Securities and Exchange Commission (SEC) published some observations from its cybersecurity examinations in August which noted that firms need to have robust reporting frameworks.
In the EU and the UK, the General Data Protection Regulation (GDPR) will require firms to notify the correct regulator within 72 hours of a breach, and impacted individuals “without undue delay”. Failure to meet these notification requirements can result in a significant fine of up to €10m or 2% of global turnover.
There are good reasons why governments are asking firms to make a formal notification of a cyber breach. First, they are recognizing the need for more action on their part to combat hacking. Registration of incidents helps governments to understand the nature of the problem. Secondly, in some jurisdictions this information is shared in some way with other financial services firms – helping all firms to collaborate to prevent successful cyberattacks.
Thirdly, regulators are beginning to use this cyber breach reporting data in their pre-examination analysis. Supervisors can see which firms are having incidents and what kind of incidents they are having – perhaps to formulate good questions for discussion with the firm during the visit. On the flip-side, they can also see who is reporting below-normal levels of incidents. If the firm has some form of cybersecurity best-practice, then that is of interest. However, if the firm is simply not reporting cyber breaches, then more difficult questions will be asked.
As a result of these new breach reporting regulatory requirements and client expectations, firms are advised to develop specific policies and procedures for when an incident occurs. This should include identifying what their breach reporting requirements are, developing reporting templates, and actually testing this part of the incident response plan. Specific elements of the communications plan could contain when and how to:
- Notify investors
- Bring in the legal team
- Call law enforcement
- Report to the regulator if a requirement, or when to contact if no requirement
- Communicate to employees
- Disclose to clients
Best practice firms conduct table-top exercises using several different scenarios, such as ransomware, or an insider attack. If the firm outsources significant portions of its IT infrastructure, it’s important to conduct these exercises in partnership with the IT supplier. If the firm engages with third parties for other types of activities, and those activities involve use of client data, the firm should perform these table top exercises with these vendors – and ensure the vendor is aware of all reporting obligations the firm has to regulators.
If a firm is genuinely not subject to any cyber breach reporting requirements, it should nonetheless put a framework in place to document each incident and note why no reporting is required. This will help support the firm’s engagement with regulators in the future.
In short, it’s important for firms to understand the notification requirements that impact them, as well as how they wish to engage with clients – and to then formulate an incident response plan. For financial services firms, reputation and trust are of high importance, and so ensuring a solid approach can make a real difference to how well a firm weathers a cyberattack.
Michael Corcione is managing director of Cyber security and Data protection at Cordium