Nick Strange, the Director of Supervisory Risk Specialists at BoE, spoke at the 21st annual operational risk Europe Conference in London. Nick Strange examined ways to improve operational resilience of the UK financial sector and described the Financial Policy Committee’s (FPC) upcoming cyber stress testing pilot on payment systems. He discussed how BoE works internationally to ensure consistency across regulatory boundaries, along with BoE's direct engagement with the financial sector to help firms build resilience.
Mr. Strange highlighted that BoE will publish a consultation paper later this year, which will set out the proposed policies and explain the approach to supervising operational resilience. Aligning supervisory approach toward continuity of services necessitates a review of that approach. However, where possible, BoE will build on existing policies and rules, placing them within a clear and consistent framework. Key elements of the existing supervisory approach, such as reviewing the effectiveness of firms’ governance and risk management functions, will continue to be the important components in assessing firms’ operational resilience capability.
Mr. Strange mentioned that the role of FPC is to identify, monitor, and take action to remove or reduce systemic risks to protect and enhance the resilience of UK financial system. Cyber risk is one of the key risks they are focused on. FPC has indicated that it will establish a tolerance for the amount of disruption to the delivery of vital services. Where BoE will expect firms to test their own impact tolerances, FPC will ask firms to test its tolerances too, in severe but plausible scenarios. This is referred to as cyber stress testing. By testing firms’ ability to contain any disruption to business services in severe but plausible scenarios to a predefined tolerance level, a suitable degree of proportionality will be injected. He highlighted that BoE will build on its experience with financial (concurrent) stress testing, to pilot cyber stress testing.
- Specifically, later this year, BoE will test an impact tolerance for payments in a hypothetical scenario where firms’ IT systems supporting their payments function become unavailable.
- BoE will be working with a small number of firms to "test the test" and gather initial information on whether an end-of-value date tolerance for this vital service would be appropriate from a financial stability point of view.
- FPC also indicated that in future it may consider a data integrity scenario.
In recent times, the G-7 Cyber Expert Group, which represents 23 financial authorities, has issued four "Fundamental Elements" publications. The document on threat-led penetration testing may be of particular interest. As more jurisdictions and more sectors develop threat-led penetration testing, concerns have started to arise over potential risk of duplication and the slight difference in approaches. The next step for the Cyber Expert Group is to establish a collective view of vulnerabilities, which it can then use to prioritize its future work stack. The Cyber Expert Group also provides a forum for G-7 authorities to develop their collective operational capabilities. In just a couple of weeks, the Group will be facilitating a cross-border simulation exercise to explore how authorities would communicate and coordinate in the face of a significant cyber incident. The group will also examine the consequences of a resulting multi-day disruption at a large international bank that may be financially viable, but operationally disabled.
He highlighted that BoE engages with the financial sector in ways other than consultations. First, together with UK Finance, BoE co-chairs the Cross Market Operational Resilience Group (CMORG). The job of CMORG is to promote work that strengthens the resilience of the financial sector and its ability to respond to operational incidents. The second initiative, which he highlighted, relates to industry coordination in the event of a serious cyber event. Following a successful fact-finding mission (nicknamed project Strider), the finance industry has come together to initiate the Financial Sector Cyber Collaboration Center.
Related Link: Speech
Keywords: Europe, UK, Banking, Insurance, Securities, Operational Resilience, Stress Testing, Cyber Risk, Cyber Risk, Supervisory Approach, Threat-Led Penetration Testing, FCA, BoE
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