Home Features Effective Third Party Risk Management in Financial Services

Effective Third Party Risk Management in Financial Services

by Brian Sims

In the last few years, we’ve seen the frequency and severity of third party cyber attacks against global financial institutions continue to increase, writes Tom Turner. One of the biggest reported attacks against financial organisations occurred in early 2016, when $81 million was taken from accounts at the Bangladesh Bank. Unknown hackers used SWIFT credentials of Bangladesh Central Bank employees to send more than three dozen fraudulent money transfer requests to the Federal Reserve Bank of New York asking the bank to transfer millions of Bangladesh Bank’s funds to bank accounts in the Philippines, Sri Lanka and other parts of Asia.

Bangladesh Bank managed to halt $850 million in other transactions. A typo made by the hackers raised suspicions that prevented them from stealing the full $1 billion they were after.

In the UK, the Financial Conduct Authority reported 69 attacks in 2017 compared to 38 reported in 2016, representing a rise of more than 80% in just 12 months. We saw two main trends last year. First, there was a continuation of cyber attacks targeting systems running SWIFT — a fundamental part of the world’s financial ecosystem. As SWIFT software is unified and used by almost all the major players in the financial market, attackers were able to use malware to manipulate applications responsible for cross-border transactions, making it possible to withdraw money from any financial organisation in the world. Victims of these attacks included several banks in more than ten countries around the globe.

Second, we witnessed the range of financial organisations that cyber criminals have been trying to penetrate expand significantly. Different cyber criminal groups attacked bank infrastructures, e-money systems, cryptocurrency exchanges and capital management funds. Their main goal was to withdraw very large sums of money.

With the evolving risk landscape and the challenges of new potential risks including third party risks, companies within financial services need a set of management procedures and a framework for identifying, assessing and mitigating the risks these challenges present. Effective risk management offers sound judgement in making decisions about what is the appropriate resource

Risk management lifecycle

The basic principle of a risk management lifecycle is to mitigate risk, transfer risk and accept/monitor risk. This involves identification, assessment, treatment, monitoring and reporting.

In order to mitigate risk, an organisation must measure cyber risk performance and incentivise critical third party vendors to address security issues through vendor collaboration.

In terms of identification, you can’t manage your risks if you don’t know what they are or if they exist. The first step is to uncover the risks and define them in a detailed, structured format. You need to identify the potential events that would most influence your ability to achieve your objectives, then define them and assign ownership.

Once the risks are identified they need to be examined in terms of likelihood and impact. This is also known as an assessment. It’s important to assess the probability of a risk and its consequences. This will help identify which risks are priorities and require the most attention. You need to have some way of comparing risks relative to each other and deciding which are acceptable and which require further management. In this way, you establish your organisation’s risk appetite.

To transfer risk, an organisation is advised to influence vendors to purchase cyber insurance to transfer risk in the event of a cyber event.

Defining an approach for treatment

Once the risk has been assessed, an approach for treatment of each risk must then be defined. After assessment, some risks may require no action and only need continuous monitoring, but those that are seen as not acceptable will require an action or mitigation plan to prevent, reduce or transfer that risk.

To accept and monitor risk, the organisation must understand potential security gaps and may need to accept certain risks due to business drivers or resource scarcity.

Once the risk is identified, assessed and a treatment process defined, it must be continuously monitored. Risk is evolutionary and can always change. The review process is essential for proactive risk management.

Reporting at each stage is a core part of driving decision-making in effective risk management. Therefore, the reporting framework should be defined at an early point in the risk management process, by focusing on report content, format and frequency of production.

Managing with risk transfer

Risk transfer is a strategy that enterprises are considering more and more. It mitigates potential risks and complies with cyber security standards. As cyber crime rises, an insurer’s view of cyber security has changed from being a pure IT risk to one that requires Board-level attention. Insurance is now viewed as fundamental in offsetting the effects of a cyber attack on a financial institution. However, insurers will want to know that appropriate and audited measures are in place to prevent an attack in the first place and respond correctly when cyber security does fail.

An organisation’s risk management responsibility now extends down the supply chain and insurers will want to know the organisation’s strategies to monitor and mitigate third party vendor risk.

Simplifying risk management and the transfer of risk can also be accomplished by measuring your organisation’s security rating. This is a similar approach to credit ratings for calculating risk. Ratings provide insight into the security posture of third parties as well as your own organisation. The measurement of ratings offers cost savings, transparency, validation and governance to organisations willing to undertake this model.

Tom Turner

Tom Turner

The benefits of security ratings will be as critical as credit ratings and other factors considered in business partnership decisions in the very near future. The ratings model within risk management can help organisations collaborate and have productive data-driven conversations with regards to risk and security where they may not have been able to previously.

For the remainder of this year, we will see a continuation of third party cyber attacks targeting systems running SWIFT, allowing attackers to use malware in financial institutions to manipulate applications responsible for cross-border transactions across the world. Banks generally have more robust cyber defences than other sectors because of the sensitive nature of their industry and to meet regulatory requirements. However, once breached, financial services organisations’ greatest fear is copycat attacks. This is where an effective risk management strategy can enable better cost management and risk visibility related to business operational activities.

Inevitably, this leads to better management of marketplace, competitive and economic conditions, while also increasing leverage and the consolidation of different risk management functions.

Tom Turner is CEO at BitSight

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