COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/43/EC, 2009/65/EC, 2009/138/EU, 2011/61/EU, 2013/36/EU, 2014/65/EU, (EU) 2015/2366 and (EU) 2016/2341
Date: 2020-10-16
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: blockchain, digital single market, electronic money, financial institution, financial legislation, financial services, information security, information technology, innovation, virtual currency

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 16.10.2020  SWD(2020) 204 final/2  This document corrects document SWD(2020) 204 final of 24.09.2020 Two references in the title of the cover page have been corrected. Concerns the EN version only. The text shall read as follows: COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT  Accompanying the document Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/43/EC, 2009/65/EC, 2009/138/EU, 2011/61/EU, 2013/36/EU, 2014/65/EU, (EU) 2015/2366 and (EU) 2016/2341              {COM(2020) 596 final} - {SEC(2020) 309 final} - {SWD(2020) 203 final}  
 
 
Impact assessment on Proposal for a Regulation on digital operational resilience in the financial sector 

Executive Summary Sheet 

A. Need for action 

Why? What is the problem being addressed?  
The  financial  sector  extensively  relies  on  information  and  communication  technologies  (ICT).  The  current 
COVID-19  pandemic  is  likely  to  accelerate  this,  given  the  benefits  in  ensuring  continuous  remote  access  to 
financial  services.  Reliance  on  digital  technologies  come  with  concerns  though;  firms  need  to  be  able  to 
withstand potential ICT disruptions so that digital incidents and threats are addressed and services maintained. 
In  a  highly  interconnected  financial  sector  that  deploys  cross-border  vital  services  on  which  the  real  economy 
depends,  vulnerabilities  stemming  from  ICT  dependence,  while  applicable  to  all  economic  sectors,  are 
particularly pronounced because of (1) the deep and broad use of ICT, and (2) the potential for the effects of an 
operational  incident  at  one  financial  firm  or financial  sub-sector  to  quickly  spread  to  other  firms  or  parts  of  the 
financial sector and ultimately to the rest of the economy.  
Despite the financial sector being very advanced in its market and regulatory integration and thriving on a single 
set of harmonised rules – the EU single rulebook –, the EU response to increased operational resilience needs 
at both horizontal and sectorial level has been either: 

- 

- 

based on minimum harmonisation, thus leaving room for national interpretation and fragmentation in the 
single market, or  
too  general  and  of  limited  application,  addressing  overall  operational  risk  to  a  varying  extent,  partially 
regulating  some  components  of  digital  operational  resilience  (e.g.  ICT  risk  management,  incident 
reporting and ICT third party risk) while leaving others out (testing).  

EU intervention so far has not addressed operational risk in a way that corresponds to financial firms’ needs to 
withstand, respond and recover from ICT vulnerabilities, nor does it provide financial supervisors with the tools to 
fulfil their mandate to contain financial instability stemming from those ICT vulnerabilities.  
The  current  gaps  and  inconsistencies  have  led  to  a  proliferation  of  uncoordinated  national  initiatives  (e.g.  on  
testing)  and  supervisory  approaches  (e.g.  to  ICT  third  party  dependencies),  which  translate  either  in  overlaps, 
duplications in requirements and high administrative and compliance costs for cross-border financial firms or in 
ICT  risks  remaining  undetected  and  unaddressed.  Overall,  the  financial  sector  stability  and  integrity  are  not 
guaranteed  and  the  single  market  for  financial  services  remains  fragmented,  with  the  consequence  that 
consumer and investor protection are weakened.  

What is this initiative expected to achieve?  
The overall objective is to strengthen the digital operational resilience of the EU financial sector by streamlining 
and upgrading existing EU financial legislation and introducing new requirements where gaps exist, aimed at:  

improving financial firms’ management of ICT risks;  
increasing supervisors’ knowledge of threats and incidents;  
improving financial firms’ testing of their ICT systems; and  

 
 
 
  better overseeing risks stemming from financial firms’ dependency on third party ICT providers.  

More specifically, the proposal would create a more coherent and consistent incident reporting mechanisms and 
thus reduce administrative burdens for financial institutions and strengthen supervisory efficiency.  

What is the value added of action at the EU level?  
The EU single market for financial services is governed by a large body of rules set out at EU level that enables 
financial firms authorized in one Member State to provide services throughout the single market thanks to an EU 
passport.  As  a  result,  rules  at  national  level  would  not  be  an  effective  way  to  strengthen  the  operational 
resilience of financial firms that make use of the passport. Furthermore, the EU  single rulebook contains, as a 
result  of  the  financial  crisis,  highly  detailed  and  prescriptive  rules  addressing  more  “traditional”  risks  such  as 
credit,  market,  counterparty  and  liquidity  risks.  The  existing  provisions  on  operational  risk  remain  general. 
Strengthening  digital  operational  resilience  requires  adjustments  in  provisions  on  operational  risks  that  are 
already defined at EU level – and hence can only be upgraded and complemented at EU level.  

B. Solutions 

What  legislative  and  non-legislative  policy  options  have  been  considered?  Is  there  a  preferred 
choice or not? Why?  
The impact assessment has considered three options, in addition to a baseline scenario of no action as regards 
EU financial services legislation. More specifically:  

2 

 
 
 

“Do nothing”: rules on operational resilience would continue to be set by the current, diverging set of 
EU financial services provisions, partly by the NIS Directive, and by existing or future national regimes; 
  Option 1 – strengthening capital buffers: an additional capital buffer would be introduced to increase 

financial firms’ ability to absorb losses that could arise due to a lack of operational resilience; 

  Option  2  –  a  financial  services  digital  operational  resilience  act:  this  would  introduce  a 
comprehensive  framework  at  EU  level  setting  out  rules  on  the  digital  operational  resilience  for  all 
regulated financial institutions, that would 

o  address ICT risks more comprehensively,  
o  enable financial supervisors’ access to information on ICT related incidents,  
o  ensure that financial firms assess the effectiveness of their preventive and resilience measures 

and identify ICT vulnerabilities;  

o  strengthen the outsourcing rules governing the indirect oversight of ICT third party providers; 
o  enable  a  direct  oversight  of  the  activities  of  ICT  third  party  providers  when  they  provide  their 

services to financial firms and 

o  additionally, incentivise the exchange of threat intelligence in the financial sector.  

  Option 3 –resilience act combined with centralised supervision of critical third party providers: in 
addition  to  an  operational  resilience  act  (option  2),  a  new  authority  would  be  created  to  supervise  ICT 
third  party  providers  of  critical  ICT  services  to  financial  firms.  It  would  also  more  clearly  delineate  the 
financial sector from the scope of the NIS Directive.  

Option 2 is the preferred choice. Compared to the other options, it is the one that achieves most of the objectives 
of the initiative, while taking into account the criteria of efficiency and coherence. This option also enjoys most 
support from the stakeholders. 

Who supports which option?   
Most stakeholders (private, public) agree that EU action is needed to better safeguard financial firms’ operational 
resilience.  Many  also  believe  that  EU  action  it  is  necessary  to  address  the  regulatory  burdens  stemming  from 
financial firms being subject to duplicative and inconsistent rules set out in NIS, EU financial services law and 
national regimes (e.g. as regards incident reporting). Accordingly, few stakeholders support doing nothing. Few 
stakeholders see merit in safeguarding  operational resilience by means of increased capital buffers (option 1). 
Still,  this  is  the  traditional  approach  to  operational  risk,  notably  in  banking,  and  is  as  such  considered  by  e.g. 
international  standard  setters.  The  type  of  qualitative  measures  set  out  in  option  2  that  would  streamline  and 
upgrade EU financial legislation and introduce new requirements where gaps exist while maintaining links to the 
horizontal  NIS  Directive  garners  broad  support  from  stakeholders  responding  to  the  public  consultation.  While 
some  stakeholders  (notably  public)  see  merit  in  the  strengthened  supervision  of  ICT  third  party  providers  of 
option 3, the creation of a new EU authority to that end only meets limited stakeholder support as does the more 
complete break with the NIS framework. 

C. Impacts of the preferred option 

What are the benefits of the preferred option (if any, otherwise main ones)?                                       
Option  2  would  address  ICT  risks  across  the  financial  sector  by  enhancing  the  capabilities  of  financial 
institutions  to  withstand  ICT  incidents.  This  would  reduce  the  risk  of  a  cyber  incident  quickly  spreading  across 
financial markets. While it is difficult to estimate the costs of operational incidents in the financial sector (not all 
incidents reported; scope of costs uncertain), industry assessments suggest that costs for the EU financial sector 
could range between EUR2-27bn per year. The preferred option would mitigate these direct costs and any wider 
impacts  that  major  cyber  incidents  may  have  on  financial  stability.  The  elimination  of  overlapping  reporting 
requirements  would  reduce  administrative  burdens.  For  example,  for  some  the  largest  banks  the  associated 
savings  may  range  between  EUR40  to  100  million  per  year.  Direct  reporting  would  also  increase  supervisors’ 
knowledge of ICT incidents. Harmonised testing practices would increase detection of unknown vulnerabilities 
and risks. It would also decrease costs, especially for cross-border firms. For example, for the 44 largest cross-
border  banks,  total  expected  benefits  of  a  common  approach  to  testing  could  range  between  EUR11  and  88 
million. By introducing a coherent set of rules on managing the risks of third party providers of ICT services, 
financial firms would have more control on how third party providers comply with the regulatory framework, which 
could comfort supervisors. There would also be prudential benefits stemming from supervisory oversight of ICT 
third  party  providers.  Overall,  the  preferred  option  translates  into  broader  societal  benefits,  stemming  from  a 
more  resilient  operating  environment  for  all  financial  market  participants  and  strengthened  consumer  and 
investor protection. 

What are the costs of the preferred option (if any, otherwise main ones)?                                      
The preferred option would give rise to both one-off and recurring costs. As regards the former, they are due to 

3 

 
 
investments in  IT systems and  are  difficult to quantify given the  different state of firms’ legacy systems. In the 
absence  of  regulatory  intervention,  some  financial  firms  have  already  made  significant  investments  in  ICT 
systems. This means that for large financial firms, implementing the measures of this proposal  are likely to be 
low..  For smaller firms, the costs are expected to be lower as well, as they  would be subject to less stringent 
measures  proportionate  to  their  lower  risk.  As  regards  testing,  the  European  Supervisory  Authorities  have 
estimated that the costs related to threat-led penetration testing range between 0.1% and 0.3% of the total ICT 
budget of concerned firms. Costs related to incident reporting would be drastically reduced, as there would be no 
overlaps  with the NIS reporting.  Supervisors will also  incur some costs, due to the additional tasks they  would 
take  on.  For  example,  for  supervisors  taking  part  in  the  direct  oversight  of  third  party  ICT  providers,  the 
estimated increase in FTEs could be expected in the range of 1 to 5 FTEs for the leading authority, and around 
0.25 FTEs for the participating authorities. 

How will businesses, SMEs and micro-enterprises be affected?  

The preferred option would cover all financial firms in order to increase the operational resilience of the sector as 
a  whole.  This  broad  scope  is  important  in  light  of  the  interconnected  nature  of  the  financial  sector  and  the 
corresponding  need  to  have  a  sound  degree  of  overall  operational  resilience  overall.  However,  when  defining 
core requirements across the main areas of intervention, the principle of proportionality would apply both across 
subsectors  as  well  as  within  each  subsector.  It  would  take  into  account,  inter  alia,  differences  in  business 
models,  size,  risk  profile,  systemic  importance,  etc.  For  example,  measures  on  incident  reporting  and  testing 
would be less stringent for smaller financial firms.  

Will there be significant impacts on national budgets and administrations?  
No.  The  additional  oversight  may,  as  demonstrated  above,  require  a  limited  degree  of  additional  supervisory 
resources, which may in full or in part (if supervisory fees) be shouldered by public budgets.  

Will there be other significant impacts?  
The  socio-economic  consequences  of  the  Covid-19  pandemic  illustrate  the  critical  nature  of  digital  financial 
markets and their operational resilience. The preferred option would lay a sound base for harnessing the digital 
transformation by ensuring that the single market for financial services, including in the banking and the capital 
markets unions, is operationally resilient, based on a common set of rules and requirements that pursue security, 
performance,  stability  and  a  level  playing  field.  This  will  also  strengthen  Europe’s  position  as  a  financial  and 
digital  leader in the  world,  an objective set by the Commission in  its Communication “Shaping Europe’s digital 
future”.  

D. Follow up 

When will the policy be reviewed?  
The first review would take place three years after the entry into force of the legal instrument. The Commission 
would provide a report to the European Parliament and the Council on its review. The review could be supported 
by a public consultation, studies, expert discussions, surveys, workshops, as appropriate.  

4