Understanding DORA’s Five Pillars: A Framework for Digital Operational Resilience

The Digital Operational Resilience Act (DORA) is a regulatory framework designed to enhance the resilience of financial institutions across the European Union. Financial entities in scope for DORA will be expected to comply to the regulation from January 2025.

With the increasing complexity of digital operations and the rising threat of cyber incidents, DORA seeks to ensure that financial entities are prepared to withstand, recover from, and adapt to any operational disruptions. The regulation covers several critical aspects of digital resilience and introduces stringent requirements for financial firms and their service providers.

At the core of DORA are its five pillars, which collectively provide a comprehensive approach to digital operational resilience. These pillars outline the regulatory expectations for managing ICT risks, incident reporting, resilience testing, third-party risk management, and information sharing. Let’s explore these five pillars in detail and understand how they impact financial entities.

Pillar 1: ICT Risk Management

The first pillar of DORA focuses on ICT risk management, placing ultimate accountability on a financial institution’s management body. This responsibility extends to setting up a robust ICT risk management framework, overseeing the digital resilience strategy, and managing risks posed by third-party providers.

Under this pillar, firms must identify their Critical or Important Functions (CIFs) and ensure that these functions remain resilient in the face of digital disruptions. A key aspect of compliance involves conducting thorough scenario testing to assess the potential impact of severe disruptions, such as cyberattacks or system failures.

Key Takeaways:

• Full accountability rests with management for ICT risk management
• Financial firms must identify CIFs and ensure their resilience
• Regular scenario testing is crucial to managing risks effectively

Pillar 2: ICT Incident Management, Classification, and Reporting

DORA’s second pillar introduces new requirements for ICT incident management. Financial entities must establish processes to manage, classify, and report ICT-related incidents, including cyber threats. This pillar emphasizes a multi-stage reporting process that ensures competent authorities (CAs) are informed promptly about any incidents that could impact financial stability.

The classification of incidents will be based on the severity and impact on operations, with each category triggering specific reporting obligations. Firms must ensure they have effective incident detection mechanisms in place and that their reporting capabilities meet DORA’s standards.

Key Takeaways:

• Financial institutions must classify and report ICT-related incidents in multiple stages
• Prompt reporting to regulators is essential for compliance
• Incident detection and management processes must be robust and well-documented

Pillar 3: Digital Operational Resilience Testing

The third pillar of DORA requires financial firms to regularly test the resilience of their digital operations through Threat-Led Penetration Testing (TLPT) and other risk-based assessments. The focus is on ensuring that critical functions and services can withstand disruptions, and that vulnerabilities are identified and addressed before they are exploited.

Financial entities must conduct regular vulnerability assessments and penetration testing to evaluate the resilience of their ICT systems. Additionally, DORA introduces the concept of purple-team testing, combining both offensive (red team) and defensive (blue team) testing strategies to improve operational resilience. Ensuring third-party providers are included in these testing procedures is also a vital part of compliance.

Key Takeaways:

• Regular risk-based testing is required to assess resilience
• TLPT simulates real-world cyberattacks to identify vulnerabilities
• Purple-team testing combines offensive and defensive approaches for more comprehensive testing
• Third-party providers must participate in resilience testing

Pillar 4: Managing ICT Third-Party Risk

The fourth pillar of DORA addresses ICT third-party risk management, placing a strong emphasis on managing risks associated with third-party service providers. Even firms compliant with existing guidelines, such as those from the European Banking Authority (EBA), will face new demands under DORA, particularly in terms of contract reviews and obligations around subcontracting.

Financial institutions must conduct thorough due diligence when selecting ICT service providers, ensuring that these providers meet DORA’s stringent resilience and compliance standards. Contracts must clearly outline responsibilities for operational resilience, incident reporting, and regulatory compliance. Furthermore, ongoing monitoring of third-party providers is essential to ensure continuous alignment with DORA requirements.

Key Takeaways:

• Broader contract reviews and stringent subcontracting obligations are required
• Due diligence on third-party providers must focus on operational resilience and compliance
• Continuous monitoring of third-party providers is essential to mitigate risks

Pillar 5: Information Sharing Agreements

The final pillar of DORA introduces the requirement for information sharing agreements between financial institutions and relevant authorities. This pillar aims to foster collaboration and improve the overall resilience of the financial sector by promoting the exchange of information on cyber threats and incidents.

DORA encourages financial firms to participate in Information Sharing and Analysis Centers (ISACs), which provide a platform for sharing threat intelligence and best practices. These agreements are critical for strengthening collective defense mechanisms against cyber threats and improving incident response capabilities.

Key Takeaways:

• Information sharing is essential for enhancing cyber resilience
• Participation in ISACs promotes secure collaboration on threat intelligence
• Cross-border cooperation strengthens the overall defense against cyber threats

Conclusion

DORA represents a significant shift in how financial institutions manage ICT risks and ensure their operational resilience. By addressing everything from risk management and incident reporting to third-party oversight and information sharing, DORA sets the foundation for a more resilient financial sector in the face of increasing digital threats.

For financial firms, meeting the requirements of DORA’s five pillars will involve significant changes in governance, risk management, and operational processes. However, these efforts will pay off in the form of enhanced resilience, improved compliance, and a stronger ability to withstand digital disruptions.

As the January 2025 compliance deadline approaches, firms must take proactive steps to align with DORA’s requirements and ensure they are well-prepared for the challenges ahead. By implementing effective risk management strategies, engaging with third-party providers, and participating in information-sharing initiatives, financial entities can safeguard their operations and ensure long-term resilience in a rapidly evolving digital landscape.