Data Compliance for Financial Services
Let’s jump in and learn:
- What Is Financial Compliance?
- Top Five Data Compliances for Financial Services
- Examples of the United Kingdom (U.K.) and European Union (E.U.) Drivers for Financial Data Compliance
- Why are Compliance Laws Important?
- Limitations of Compliance Laws
- Tips for Complying with Data Security Regulations
- Financial Data Compliance Improves Overall Security
What Is Financial Compliance?
Financial compliance is financial institutions’ (e.g., financial services organizations, capital markets) adherence to internal and external rules set forth by governments, industry groups, and internal governance policies. Financial data compliance is a governance structure focused on data protection that ensures that an organization complies with laws, regulations, and standards around its data. Financial data compliance includes processes and security tools to govern and secure the possession, organization, storage, and management of digital assets or data to prevent loss, theft, misuse, or compromise. Different financial data compliance regulations specify the types of data that require protection and, in some cases, direct what should be done to ensure its security.
|Origin of Financial Compliance|
The term was first used by the Basel Committee on Banking Supervision (BCBS, the primary global standard setter for the prudential regulation of banks) in 2005. In its document “Compliance and the compliance function in banks,” the body defines compliance, “
The expression compliance risk is defined in this paper as the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its banking activities.”
Financial data compliance helps organizations prevent legal issues and financial losses and improve overall cybersecurity by implementing best practices and employing proven cybersecurity frameworks. The importance of financial data compliance continues to grow as regulations continue to expand globally to ensure that customers’ personal information and finances are protected from theft and fraud.
Advantages of Financial Data Compliance and Cost of Non-Compliance
|Benefits of financial data compliance||Not following financial data compliance|
|View of the most critical data and systemsPlan for cybersecurity tools and practicesProtection of valuable informationRapid response to cybersecurity incidents||Operational disruptionsReputational damageCivil and criminal lawsuitsFines and losses due to cybersecurity incidents|
Top Five Data Compliances for Financial Services
Five Most Important United States Drivers for Financial Data Compliance
1. Commodities Future Trading Commission (CFTC)
The CFTC oversees the U.S. derivatives markets, including futures contracts, options, and over-the-counter (OTC) markets. While the rules that the CFTC has oversight of were part of the Commodities Exchange Act (CEA), which was passed in 1936, the Commission itself was established in 1974 by the passage of the Commodities Futures Trading Commission Act. The mission of the CFTC is to enforce laws, rules, and regulations within the derivatives markets it oversees to help ensure that firms and individuals operating in such markets provide legally required privacy rights to their consumers and promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.
2. Federal Deposit Insurance Corporation (FDIC)
The FDIC provides deposit insurance of at least $250,000 for accounts with banks and thrift institutions. The FDIC aims to preserve and promote the public’s confidence in the U.S. financial system by providing deposit insurance. The FDIC is also responsible for enforcing financial data compliance as part of its mandate to ensure that banks comply with consumer data protection laws, including the Gramm-Leach-Bliley Act, which includes data security directives.
3. Federal Reserve
The Federal Reserve Banking System provides guidance on managing outsourcing risk, including data for all financial institutions supervised by the Federal Reserve. It is also responsible for supervising, monitoring, inspecting, and examining institutions’ financial data compliance to ensure that they adhere to the necessary rules and regulations, including those published by the Federal Financial Institutions Examination Council (FFIEC) and Section 501 of the Gramm-Leach-Bliley Act (GLBA), regarding safeguards for customer data.
4. Federal Financial Institutions Examination Council (FFIEC)
The Federal Financial Institutions Examination Council is a five-member U.S. government interagency body. It consists of five banking regulators and is responsible for uniformity in the guidelines and supervision of financial institutions, including financial data compliance. It includes financial data management mandates, such as directing how organizations should govern the secure storage of all types of sensitive information, whether on computer systems, physical media, or hard-copy documents.
5. Financial Industry Regulatory Authority (FINRA) SEC Rules 17a-4
The Securities and Exchange Commission (SEC) requires broker-dealers to adhere to numerous financial data compliance regulations, including SEC Rule 17a-4(f)(3)(vii), which includes strict mandates on how electronic data must be stored, how it can be accessed, and how and when the archiving process should be reviewed.
Several additional U.S. drivers for financial data compliance include the following:
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)
The Dodd-Frank Act was enacted in 2010 to facilitate financial stability by augmenting transparency and accountability. Financial data compliance requirements include specific directives related to email. To adhere to Dodd-Frank financial data compliance requirements related to communication, financial organizations must take steps to preserve email communication within proscribed periods of time with redundancy and other procedures to ensure that it is protected.
Office for the Comptroller of the Currency (OCC)
The Office for the Comptroller of the Currency (OCC) is an independent bureau of the U.S. Department of the Treasury that charters, regulates, and supervises all national banks and federal savings associations, as well as federal branches and agencies of foreign banks. As part of its charter to protect consumers, the OCC enforces federal data compliance regulations, such as FFIEC, GLBA, and the Privacy Act of 1974.
Securities Exchange Commission (SEC)
The Securities Exchange Commission (SEC) protects investors by ensuring the maintenance of fair, orderly, and efficient markets and facilitating capital formation. The SEC Cybersecurity Rule 2023 requires that market entities (e.g., broker-dealers, national securities exchanges) establish, maintain, and enforce written policies and procedures that are reasonably designed to address their cybersecurity risks. With regard to financial data compliance, the SEC requires any data breach that compromises the confidentiality, integrity, or availability of an information asset.
Sarbanes-Oxley Act (SOX)
SOX focuses on how organizations disclose and record their financial information. Financial data compliance provisions dictate that organizations must install cybersecurity to protect financial data.
Sections 302 and 304 of SOX set standards for data protection. While SOX does not specify any specific controls to protect financial data, encryption is widely considered to be the best practice.
Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a Belgian cooperative society providing services related to the execution of financial transactions and payments between banks worldwide. Financial organizations that use SWIFT services must comply with SWIFT Customer Security Program (CSP) requirements. The framework outlines requirements for data protection, access management, and incident response. The SWIFT Customer Security Controls Framework has three objectives with eight principles.
1. Secure your environment
- Restrict internet access
- Segregate critical systems from general IT environments
- Reduce attack surface and vulnerabilities
- Physically secure the environment
2. Know and limit access
- Prevent compromise of credentials
- Manage identities and segregate privilege
3. Detect and respond
- Detect anomalous activity in systems or transactional records
- Plan for incident response and information sharing
Examples of the United Kingdom (U.K.) and European Union (E.U.) Drivers for Financial Data Compliance
General Data Protection Regulation (GDPR)
GDPR is the primary law regulating how organizations protect E.U. citizens’ personal data, setting forth stringent financial data compliance requirements. Several of the financial data requirements for GDPR that impact financial institutions are:
- Individuals must give explicit consent for their personal data to be collected and used.
- Individuals must understand how their information is going to be used.
- Organizations must clearly stipulate the legal channels available should data processing not comply with its agreed-upon use.
- All personal data must be destroyed after a prescribed period of time.
- In the event of a serious cyberattack, organizations must inform all those affected by the security breach and the Information Commissioner’s Office within 72 hours.
Markets in Financial Instruments Directive II (MiFID II)The primary objective of MiFID II is to enhance investor protection with increased transparency and reporting, enhanced governance rules, and heightened regulation of markets.
Related to financial data compliance, MiFID II, banks, and financial firms must implement common data processes and data quality metrics, which requires the adoption of data standards to ensure consistency of reporting across all regulated activities. Financial institutions must also manage multiple identiﬁers, including industry standard Market Identiﬁer Codes (MIC) and the Global Legal Entity Identiﬁer (LEI) to meet financial data compliance requirements.
Why are Compliance Laws Important?
Financial data compliance laws are important for many reasons, including:
- Avoids financial losses due to operational disruption caused by a cyber attack
- Eliminates the risk of fines and other penalties for non-compliance
- Ensures the protection of sensitive and personal information
- Protects organizations’ reputations by minimizing the chance of a security incident that must be reported
Limitations of Compliance Laws
There are many limitations to financial data compliance laws. Five of the ones that regulators struggle to stay ahead of are:
1. Constantly morphing attack strategies and vectors
2. Data privacy and security challenges
3. Employee and third-party misconduct—accidental and malicious
4. Lack of corporate governance
5. Loopholes that enable money laundering, insider trading, and other types of market abuse
Other Standards and Frameworks to Know
Anti-Money Laundering (AML)
AML prevents illegally passing obtained funds through a complex system in order to make the funds appear legitimate and legal. The Financial Crimes Enforcement Network (FinCEN) oversees government efforts to combat money laundering in the U.S. FinCEN detects, prevents, and deters money laundering and terrorist financing. Financial data compliance best practices help organizations identify suspicious activity that could indicate money laundering.
Know Your Client, Know Your Customer (KYC)
KYC is a standard practice that requires financial institutions to be able to identify the client they are working with, ensure the client is who they say they are, know the client’s tolerance to risk, and be aware of the client’s financial position. Financial data compliance requires financial institutions that collect and store KYC data to ensure that customer data (e.g., biometric or non-biometric personal data) is protected and not at risk of unauthorized access or exfiltration.
Payment Card Industry Data Security Standard (PCI DSS)
PCI DSS is a series of financial data compliance security guidelines to safeguard consumer data. It standardizes how cardholder data is processed, stored, and transmitted. These regulations are set forth by the Federal Trade Commission, which governs the distribution of private financial information.
This financial data compliance regulation includes rules that require financial institutions to keep customers informed of any data-sharing practices in which they engage. PCI DSS also requires financial institutions to provide customers with educational materials explaining how they can opt out of these data-sharing practices. Data encryption and key management are key parts of PCI DSS financial data compliance.
National Institute of Standards and Technology Cybersecurity Framework
The NIST Cybersecurity Framework provides recommendations for safeguarding client privacy. These best practices are based on the guidelines that the federal government develops to ensure privacy and sensitive information to avoid breaches in security. Many financial data compliance directives include data encryption and destruction standards in the NIST Cybersecurity Framework.
Tips for Complying with Data Security Regulations
When considering how to address financial data compliance, look to leaders and peers for best practices. The following are several of the most common approaches to achieving financial data compliance.
Appoint someone in charge of financial data compliance
- Assign someone to or employ someone for the role of data protection officer (DPO) or chief compliance officer (CCO) who is a security expert
- Empower the DPO or CCO to enforce the financial data compliance requirements
- Instruct the DPO or CCO to stay on top of the ever-changing regulatory landscape
Assess and manage financial data compliance risks
- Audit and measure cybersecurity risks
- Evaluate the efficacy of cybersecurity plans and tools to respond to cyberattacks and system failures
- Inventory the organization’s security posture and identify potential threats
- Keep an eye on data security trends and threats
- Manage third-party risks
Employ identity and access management to adhere to finance data management requirements
- Implement multi-factor authentication (MFA)
- Implement the principle of least privilege
- Limit access to critical assets
- Prohibit access unless necessary
- Require the use of strong passwords
- Verify user identities
Establish a cybersecurity policy for financial data compliance
- Document all the measures and tools needed to protect valuable assets and sensitive information
- Enforce accountability across the organization with a culture of compliance
- Follow industry best practices
- Schedule mandatory employ cybersecurity awareness training courses
Implement and measure network and data security for financial data compliance
- Deploy fundamental security measures, such as end-point protection, firewalls, intrusion detection systems, and intrusion prevention systems
- Encrypt valuable and sensitive data
- Reduce the possible attack surface
- Restrict network access to sensitive systems
- Segment the main networks into smaller subnetworks
- Separate the most critical assets from the rest of the I.T. environment
Leverage visibility to ensure financial data compliance
- Continuously monitor user activity
- Keep a log of users’ actions
- Undergo regular external audits
Maintain financial data compliance in the event of a security incident
- Backup critical data and test accessing it regularly
- Develop and test business continuity and incident response plan
- Hold an off-site backup of the application source code, data, configuration settings, and critical data
- Report security incidents in a timely manner—never conceal an incident
Financial Data Compliance Improves Overall Security
Since financial institutions are required to adhere to multiple data financial compliance requirements, which are constantly being amended to address new risks, they are able to keep their dated security programs updated to keep up with a changing threat landscape. The growing stringency of financial data compliance requirements also pushes organizations to rethink updating legacy security systems and implementing newer, more effective solutions that are purpose-built for current environments. These newer solutions for addressing financial data compliance requirements are trending toward the cloud and away from on-premises deployments. They also offer increased automation, which helps skirt the limited I.T. security personnel issue.
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Last Updated: 14th November, 2023