Article 28 General principles

The extensive use of ICT services is evidenced by complex contractual arrangements, whereby financial entities often encounter difficulties in negotiating contractual terms that are tailored to the prudential standards or other regulatory requirements to which they are subject, or otherwise in enforcing specific rights, such as access or audit rights, even when the latter are enshrined in their contractual arrangements. Moreover, many of those contractual arrangements do not provide for sufficient safeguards allowing for the fully-fledged monitoring of subcontracting processes, thus depriving the financial entity of its ability to assess the associated risks. In addition, as ICT third-party service providers often provide standardised services to different types of clients, such contractual arrangements do not always cater adequately for the individual or specific needs of financial industry actors.

Even though Union financial services law contains certain general rules on outsourcing, monitoring of the contractual dimension is not fully anchored into Union law. In the absence of clear and bespoke Union standards applying to the contractual arrangements concluded with ICT third-party service providers, the external source of ICT risk is not comprehensively addressed. Consequently, it is necessary to set out certain key principles to guide financial entities’ management of ICT third-party risk, which are of particular importance when financial entities resort to ICT third-party service providers to support their critical or important functions. Those principles should be accompanied by a set of core contractual rights in relation to several elements in the performance and termination of contractual arrangements with a view to providing certain minimum safeguards in order to strengthen financial entities’ ability to effectively monitor all ICT risk emerging at the level of third-party service providers. Those principles are complementary to the sectoral law applicable to outsourcing.

A certain lack of homogeneity and convergence regarding the monitoring of ICT third-party risk and ICT third-party dependencies is evident today. Despite efforts to address outsourcing, such as EBA Guidelines on outsourcing of 2019 and ESMA Guidelines on outsourcing to cloud service providers of 2021 the broader issue of counteracting systemic risk which may be triggered by the financial sector’s exposure to a limited number of critical ICT third-party service providers is not sufficiently addressed by Union law. The lack of rules at Union level is compounded by the absence of national rules on mandates and tools that allow financial supervisors to acquire a good understanding of ICT third-party dependencies and to monitor adequately risks arising from the concentration of ICT third-party dependencies.

In order to maintain a high level of digital operational resilience for the whole financial sector, and at the same time to keep pace with technological developments, this Regulation should address risk stemming from all types of ICT services. To that end, the definition of ICT services in the context of this Regulation should be understood in a broad manner, encompassing digital and data services provided through ICT systems to one or more internal or external users on an ongoing basis. That definition should, for instance, include so called ‘over the top’ services, which fall within the category of electronic communications services. It should exclude only the limited category of traditional analogue telephone services qualifying as Public Switched Telephone Network (PSTN) services, landline services, Plain Old Telephone Service (POTS), or fixed-line telephone services.

To ensure a sound monitoring of ICT third-party risk in the financial sector, it is necessary to lay down a set of principle-based rules to guide financial entities’ when monitoring risk arising in the context of functions outsourced to ICT third-party service providers, particularly for ICT services supporting critical or important functions, as well as more generally in the context of all ICT third-party dependencies.

To address the complexity of the various sources of ICT risk, while taking into account the multitude and diversity of providers of technological solutions which enable a smooth provision of financial services, this Regulation should cover a wide range of ICT third-party service providers, including providers of cloud computing services, software, data analytics services and providers of data centre services. Similarly, since financial entities should effectively and coherently identify and manage all types of risk, including in the context of ICT services procured within a financial group, it should be clarified that undertakings which are part of a financial group and provide ICT services predominantly to their parent undertaking, or to subsidiaries or branches of their parent undertaking, as well as financial entities providing ICT services to other financial entities, should also be considered as ICT third-party service providers under this Regulation. Lastly, in light of the evolving payment services market becoming increasingly dependent on complex technical solutions, and in view of emerging types of payment services and payment-related solutions, participants in the payment services ecosystem, providing payment-processing activities, or operating payment infrastructures, should also be considered to be ICT third-party service providers under this Regulation, with the exception of central banks when operating payment or securities settlement systems, and public authorities when providing ICT related services in the context of fulfilling State functions.

A financial entity should at all times remain fully responsible for complying with its obligations set out in this Regulation. Financial entities should apply a proportionate approach to the monitoring of risks emerging at the level of the ICT third-party service providers, by duly considering the nature, scale, complexity and importance of their ICT-related dependencies, the criticality or importance of the services, processes or functions subject to the contractual arrangements and, ultimately, on the basis of a careful assessment of any potential impact on the continuity and quality of financial services at individual and at group level, as appropriate.

The conduct of such monitoring should follow a strategic approach to ICT third-party risk formalised through the adoption by the financial entity’s management body of a dedicated ICT third-party risk strategy, rooted in a continuous screening of all ICT third-party dependencies. To enhance supervisory awareness of ICT third-party dependencies, and with a view to further supporting the work in the context of the Oversight Framework established by this Regulation, all financial entities should be required to maintain a register of information with all contractual arrangements about the use of ICT services provided by ICT third-party service providers. Financial supervisors should be able to request the full register, or to ask for specific sections thereof, and thus to obtain essential information for acquiring a broader understanding of the ICT dependencies of financial entities.

A thorough pre-contracting analysis should underpin and precede the formal conclusion of contractual arrangements, in particular by focusing on elements such as the criticality or importance of the services supported by the envisaged ICT contract, the necessary supervisory approvals or other conditions, the possible concentration risk entailed, as well as applying due diligence in the process of selection and assessment of ICT third-party service providers and assessing potential conflicts of interest. For contractual arrangements concerning critical or important functions, financial entities should take into consideration the use by ICT third-party service providers of the most up-to-date and highest information security standards. Termination of contractual arrangements could be prompted at least by a series of circumstances showing shortfalls at the ICT third-party service provider level, in particular significant breaches of laws or contractual terms, circumstances revealing a potential alteration of the performance of the functions provided for in the contractual arrangements, evidence of weaknesses of the ICT third-party service provider in its overall ICT risk management, or circumstances indicating the inability of the relevant competent authority to effectively supervise the financial entity.

Such contractual arrangements should also provide for dedicated exit strategies to enable, in particular, mandatory transition periods during which ICT third-party service providers should continue providing the relevant services with a view to reducing the risk of disruptions at the level of the financial entity, or to allow the latter effectively to switch to the use of other ICT third-party service providers or, alternatively, to change to in-house solutions, consistent with the complexity of the provided ICT service. Moreover, financial entities within the scope of Directive 2014/59/EU should ensure that the relevant contracts for ICT services are robust and fully enforceable in the event of resolution of those financial entities. Therefore, in line with the expectations of the resolution authorities, those financial entities should ensure that the relevant contracts for ICT services are resolution resilient. As long as they continue meeting their payment obligations, those financial entities should ensure, among other requirements, that the relevant contracts for ICT services contain clauses for non-termination, non-suspension and non-modification on grounds of restructuring or resolution.