Hacking is increasingly sophiscated, and orchestrated by crime syndicates and money launderers. Every business which uses the internet is susceptible to hacking. When hacked, the financial costs of recovery are phenomenal and the damage to reputation is irreparable. The Guidelines for Reducing and Mitigating Hacking Risks Associated with Internet Trading (Guidelines) recently released by the Securities and Futures Commission (the SFC) on 27 October 2017 tackle cybersecurity. The Guidelines introduce baseline cybersecurity requirements to be adopted by licensed or registered persons in a bid to reduce and mitigate hacking risks associated with internet trading. In addition to the Guidelines, the SFC has prepared a set of FAQs which provide further guidance on the implementation of the Guidelines. The Guidelines were issued following a public consultation which lasted from May to July 2017, during which the SFC had received a total of 36 written submissions from various industry stakeholders, professional bodies, and individuals. The Consultation Conclusions were released along with the Guidelines.
Who do the Guidelines apply to?
The Guidelines apply to persons who are engaged in internet trading of both listed and non-listed securities, and are licensed by, or registered with, the SFC for:
- dealing in securities (Type 1);
- dealing in futures contracts (Type 2);
- leveraged foreign exchange trading (Type 3); and/or
- asset management (Type 9).
Furthermore, the Hong Kong Monetary Authority in its circular issued on the same day, also required all registered institutions (i.e. authorised institutions authorised under the Banking Ordinance and registered with the SFC to conduct regulated activities) to bolster the security features of their internet trading platform in accordance with the requirements mentioned within the Guidelines.
When do the requirements come into effect?
The requirements will take effect on 27 July 2018, with the exception of the two-factor authentication (2FA) for clients' system login, which will come into effect on 27 April 2018.
What are the new requirements?
The 20 controls and measures introduced by the Guidelines can be largely classified into three categories: (a) Protection of clients' internet trading accounts; (b) Infrastructure security management; and (c) Cybersecurity management and supervision.
Protection of clients' internet trading accounts
Implementation of 2FA solution
A key control measure introduced by the Guidelines is the requirement to implement 2FA when clients login into their internet trading accounts. 2FA refers to an authentication mechanism which utilises any two of the following factors: what the client knows (e.g., a password); what the client possesses (e.g., a security token generating one-time passwords); and who the client is (e.g., the use of biometric identification).
The Guidelines, however, did not stipulate the type of 2FA solutions that internet brokers should implement. This is because the SFC is aware that there is a wide variety of 2FA solutions in the market, each with its own advantages and disadvantages. Internet brokers are therefore free to choose a 2FA solution which complements their pre-existing security measures and achieves the overall objective of reducing hacking risks. When choosing a 2FA solution, internet brokers should also assess and evaluate its cost-effectiveness and ensure that it is suitable to their own individual circumstances and customer base.
Prompt notification
Another key control measure introduced by the Guidelines is the requirement for licensed or registered persons to notify their clients promptly in the event where there is a system login, password reset, trade execution, fund transfer, and change to client and account-related information.
In the Consultation Conclusions, the SFC noted that prompt notification serves to complement 2FA as an effective detective control. For instance, based on previous hacking incidents reported to the SFC, internet brokers were able to quickly respond and prevent unauthorised transactions because their clients had alerted them after being notified of a system login which they had not made. However, there were concerns among industry stakeholders that too many notifications would defeat the purpose as clients might ignore or treat such notifications as spam messages when they receive too many.
In response to such concerns, the SFC accepted that clients may not need to be notified of each system login if they receive notifications of irregular logins, and explained in the FAQs that it would be acceptable for internet brokers to allow clients to opt out from system login notifications provided that certain requirements are met. In addition, the SFC also agreed that only notifications for a fund transfer to an unregistered third party are required and that clients can choose to opt out from trade execution notifications.
Infrastructure security management
System and Data Backup
Paragraph 2.8 of the Guidelines requires licensed or registered persons to back up their business records, client and transaction database, servers and supporting documentation in an off-line medium on a daily basis.
This requirement could potentially impose a significant burden on internet brokers, especially those who operate on a small scale and have limited resources. Such concern was voiced out during the public consultation, nevertheless the SFC still maintains the view that daily backup to an off-line medium is necessary to avoid business disruption and data loss.
On the other hand, the SFC only requires internet brokers to adopt a suitable recovery method of their own choosing since they are of the view that prescribing one may not be appropriate.
Having a successful backup and recovery plan is crucial to prevent the damage caused during a cyberattack, this is especially so if information data systems are wiped clean during the attack or recovery process.
Third-party service providers
Licensed or registered persons are permitted to outsource activities associated with its internet trading to a third-party service provider, provided that they enter into a formal service-level agreement. Such agreement should clearly specify the terms of service and the service provider's responsibilities.
However, licensed or registered persons should be aware that it is ultimately their responsibility to comply with the relevant requirements set out in the Guidelines and the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, therefore such persons should constantly review and revise their agreements with third-party service providers to ensure that the agreements comply with the current law and regulations.
Cybersecurity management and supervision
The Guidelines stipulate that there should be a clearly defined cybersecurity risk management framework, which includes policies and procedures. Such framework should also set out the key roles and responsibilities including but not limited to:
- arranging to conduct a self-assessment of the overall cybersecurity risk management framework on a regular basis;
- monitoring and assessing the latest cybersecurity threats and attacks; and
- reviewing and approving the contingency plan developed for the internet trading system.
Apart from the aforementioned framework, the SFC also requires licensed or registered persons to have clear internal and external reporting policies and procedures to be followed in the event of a suspected or actual cybersecurity incident.
Licensed or registered persons should also provide adequate cybersecurity awareness training to its staff at least on a yearly basis and take all reasonable steps to inform clients on cybersecurity risks and recommended preventive measures when using the internet trading system.
Conclusion
The SFC has mentioned in the Guidelines that the above requirements are minimum standards and are not meant to be exhaustive. Licensed or registered persons are expected to adopt adequate and effective measures having regard to their business model and operational needs.
Although the Guidelines do not have the force of law, failure to adhere to the Guidelines may affect the SFC's view on a person's fitness and properness. Licensed or registered persons should consult their cybersecurity experts and lawyers to ensure that they have the necessary controls and measures in place to meet the new regulatory requirements before they come into effect next year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
