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Cybersecurity

Global Crowdstrike outage highlights third-party risk as DORA deadline approaches

Ovie Koloko
By Ovie Koloko, Chief Product OfficerOct 1, 2024

Digital resilience and third party risk management have become key concerns for global regulators and the risks have been keenly highlighted by the recent global Crowdstrike incident.

Branded “the largest IT outage in history”, the Crowdstrike event in July saw airplanes grounded, financial services disrupted and businesses offline all over the world.[1] While there are many that worry about bad actors taking down businesses and financial services, this was not the result of a cyber attack, but a simple error in an update for Windows computers from cybersecurity firm Crowdstrike.[2]

The fact that a single small error could have such widespread consequences laid bare regulatory fears that digital resilience is not strong enough and that concentration in third party IT providers is creating points of failure in the system. Regulatory moves

In the US, the Federal Trade Commission chair Lina Khan issues a series of tweets in the aftermath of the Crowdstrike incident that underlined her concerns about market concentration in the tech industry.[3]

They read: “All too often these days, a single glitch results in a system-wide outage, affecting industries from healthcare and airlines to banks and auto-dealers. Millions of people and businesses pay the price. These incidents reveal how concentration can create fragile systems,”

“Another area where we may lack resiliency is cloud computing. In response to @FTC's inquiry, market participants shared concerns about widespread reliance on a handful of cloud providers, noting that consolidation can create single points of failure.”

US regulators have also been examining the digital resilience of the banking system. Since 2020, regulators including the Federal Reserve Board, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have sought to identify and consolidate existing guidance that can be used to form the framework for an effective operational resilience regime for banking organisations that are deemed systemically important.[4] The UK has also issued its own new operational resilience regime, launched in March 2022 by its supervisory authorities - the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and Bank of England (BoE).[1] It aims to improve the operational resilience of firms and financial market infrastructures (FMIs), and to protect consumers, the broader financial sector and the UK economy from the impact of operational disruptions.[5] Getting ready for DORA

Meanwhile, the EU has been working on perhaps the most sweeping regulatory changes with the Digital Operational Resilience Act (DORA), due to come into full effect in January 2025.[6]

DORA covers six critical areas of resilience:

  • ICT risk management: Principles and requirements on ICT risk management framework

  • ICT third-party risk management: Monitoring third-party risk providers and key contractual provisions

  • Digital operational resilience testing: Both basic and advanced

  • ICT-related incidents: General requirements and reporting of major ICT-related incidents to competent authorities

  • Information sharing: Exchange of information and intelligence on cyber threats

  • Oversight of critical third-party providers: A framework for critical ICT third-party providers

But despite these far-reaching changes and the fast-approaching deadline for DORA, as well as the atmosphere of regulatory focus on third-party and digital resilience risks, many financial services firms are not prepared.

A recent survey on Supplier Stability in Operational Resilience, commissioned by Escode, a software escrow solutions provider, found that only 20% of financial professionals have adequate stressed exit plans in place for their critical ICT vendor agreements.[7] DORA requires stressed exit plans for third and fourth parties, which is a significant strategic shift for companies.

McKinsey reported its own survey findings in June 2024, in which 94% of financial institutions said they were fully engaged in understanding the detailed requirements of the legislation.[8] Most of these organisations had completed a gap analysis and were in the process of designing or rolling out implementation programs.

However, nearly all firms reported some uncertainty around the regulation, including the redrawing of third party contracts, clarity about the scope of key items and concern over the timeline for implementation. The cost of compliance was also top-of-mind, with 70% of firms saying that continuing to meet DORA requirements will result in permanently higher run costs for technology and technology control.

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