Enhancing Operational Resilience: A Step-by-Step Guide to Implementing CPS 230 for SMBs

In an ever-evolving financial landscape, operational resilience has become a paramount concern for institutions aiming to safeguard their services against disruptions. The Australian Prudential Regulation Authority (APRA) introduced CPS 230 to strengthen the operational resilience of financial institutions. This standard mandates rigorous management of operational risk and third-party relationships, ensuring that institutions are well-prepared to handle potential disruptions.

Applicability of CPS 230

CPS 230 applies to all APRA-regulated entities, including banks, credit unions, building societies, general insurers, life insurers, private health insurers, and superannuation funds. The standard requires these entities to establish robust frameworks for managing operational risks and ensuring the resilience of critical services, including those provided by third parties and downstream suppliers.

For small and medium-sized businesses (SMBs) within the financial sector, complying with CPS 230 may seem daunting. However, with the right approach, SMBs can effectively meet these requirements and enhance their operational resilience.

Step-by-Step Guide to Implementing CPS 230

Step 1: Establish Governance and Accountability

Action:

• Form a dedicated CPS 230 implementation team.
• Assign clear roles and responsibilities, ensuring senior management and the board are accountable.

Example: Create a CPS 230 Steering Committee led by a senior executive. This committee includes heads of risk management, compliance, IT, and operations. The committee meets monthly to oversee the progress of CPS 230 implementation.

For SMBs: Even for smaller institutions, designate a senior leader or a small team responsible for overseeing CPS 230 compliance. Ensure they have the authority to implement changes and report directly to senior management.

Step 2: Develop a Comprehensive Risk Management Framework

Action:

• Integrate third-party risk management into your overall risk management strategy.
• Document policies and procedures for identifying, assessing, managing, and monitoring risks.

Example: Update your existing risk management framework to include specific processes for third-party risk. This could involve adding sections that detail how to assess the operational resilience of key vendors and downstream suppliers.

For SMBs: Simplify your risk management framework by focusing on the most critical third parties and suppliers. Document key procedures and ensure they are easily accessible to relevant staff.

Step 3: Identify Critical Services and Third Parties

Action:

• List all services and identify which ones are critical to your operations.
• Map out the third parties and downstream suppliers that support these critical services.

Example: If your institution relies on a specific cloud service provider for critical data storage, this provider would be identified as a key third party. Similarly, if you depend on a downstream supplier for essential software updates, they should be included.

For SMBs: Prioritize identifying the most vital services and their associated third parties and suppliers. Focus your efforts on those that would cause the most significant disruption if they failed.

Step 4: Conduct Enhanced Due Diligence

Action:

• Perform in-depth due diligence on third parties and downstream suppliers, focusing on their operational resilience.
• Assess their ability to handle disruptions and recover swiftly.

Example: When evaluating a new payment processing partner, review their business continuity and disaster recovery plans. Conduct site visits and request documentation on their incident response procedures. Extend this due diligence to suppliers of critical components or services.

For SMBs: Use standardized checklists and questionnaires to streamline the due diligence process. Focus on obtaining critical information about the resilience and reliability of your key partners and suppliers.

Step 5: Update Contractual Agreements

Action:

• Revise contracts to include clauses that address operational risk and resilience.
• Ensure the right to audit third parties and require timely incident notifications.

Example: Include a contract clause with your data backup provider that mandates quarterly risk assessments, annual audits, and immediate notification of any security breaches or operational disruptions.

For SMBs: While renegotiating contracts might be challenging, focus on including essential clauses that ensure operational resilience. Clearly outline expectations and consequences in case of non-compliance.

Step 6: Implement Incident Management Protocols

Action:

• Develop and document incident management procedures that include third-party and supplier incidents.
• Ensure third parties and suppliers have robust business continuity plans.

Example: Create an incident response plan that outlines steps to take if a third-party vendor or a downstream supplier experiences a major outage. This plan should detail communication protocols, backup procedures, and recovery steps.

For SMBs: Simplify your incident management plan to focus on the most likely and impactful scenarios. Ensure key contacts and procedures are well-documented and easily accessible.

Step 7: Establish Continuous Monitoring

Action:

• Set up ongoing monitoring and assessment of third-party and supplier performance and risk.
• Use technology for real-time insights into third-party and supplier operations.

Example: Utilize a third-party risk management software that provides dashboards and alerts for tracking vendor and supplier performance metrics, such as uptime, compliance with SLAs, and any reported incidents.

For SMBs: Subscribe to public threat intelligence feeds. Regularly review performance of critical third parties and address any issues promptly.

Step 8: Define Third-Party and Supplier Risk Appetite

Action:

• Clearly define and communicate the organization’s risk appetite for third-party and supplier relationships.
• Ensure engagements align with this risk tolerance.

Example: If your risk appetite is low for data breaches, ensure contracts with third-party IT providers and critical software suppliers include stringent data protection measures and penalties for non-compliance.

For SMBs: Articulate your risk appetite in simple terms and ensure all third-party and supplier engagements align with these guidelines. Communicate this clearly to all stakeholders.

Step 9: Provide Training and Awareness

Action:

• Conduct training sessions for staff on CPS 230 requirements and their role in third-party and supplier risk management.
• Raise awareness about the importance of operational resilience.

Example: Organize workshops for your procurement and risk management teams to educate them on CPS 230, focusing on how to evaluate and manage third-party and supplier risks effectively.

For SMBs: Hold regular, short training sessions to keep staff informed about CPS 230 and their specific responsibilities. Use practical examples to illustrate key points.

Step 10: Leverage Technology and Tools

Action:

• Implement advanced tools and technologies for effective third-party and supplier risk monitoring.
• Consider automation to enhance efficiency and accuracy.

Example: Deploy an AI-based risk assessment tool that automates the evaluation of third-party vendors and suppliers, analyzing factors like financial stability, compliance records, and operational resilience.

For SMBs: Look for cost-effective solutions or platforms that offer the essential features needed for third-party and supplier risk management. Utilize automation where possible to save time and resources.

By following these steps, your financial institution can successfully implement CPS 230, ensuring robust third-party and supplier risk management and enhanced operational resilience. Whether you're a large organization or an SMB, embracing these changes will help safeguard your operations and build a stronger, more resilient framework for the future.

We, at SecGenX can help you assess your current maturity and prepare a roadmap as a no-obligation complementary service. Feel free to reach out to know more at https://secgenx.com.au/tprm-maturity-assessment

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