A pathway to the cloud: Analysis of the Reserve Bank of New Zealand’s Guidance on Cyber Resilience

The Reserve Bank of New Zealand’s (RBNZ’s) Guidance on Cyber Resilience (referred to as “Guidance” in this post) acknowledges the benefits of RBNZ-regulated financial services companies in New Zealand (NZ) moving to the cloud, as long as this transition is managed prudently—in other words, as long as entities understand the risks involved and manage them appropriately. In this blog post, I analyze the RBNZ’s thinking as it developed the Guidance, and how the Guidance creates opportunities for NZ financial services customers to accelerate migration of workloads—including critical systems—to the Amazon Web Services (AWS) Cloud.

On page 14 of its Guidance, the RBNZ writes that “[i]f used prudently, third-party services may reduce an entity’s cyber risk, especially for those entities that lack cyber expertise.” This open regulatory stance towards the cloud enables our NZ financial services customers to consider a cloud first strategy for both new and existing systems, including critical workloads. Customers must, however, manage the transition to the cloud prudently, working closely with both their cloud service provider and their regulators.

This blog post is aimed at boards, management, and technology decision-makers, for whom understanding regulatory thinking is a useful input when developing an enterprise cloud strategy.

Operational technology staff and risk practitioners seeking detailed guidance on how AWS helps you align with the RBNZ’s Guidance can download our New Zealand Financial Services whitepaper from our public website and the AWS Reserve Bank of New Zealand Guidance on Cyber Resilience (RBNZ-GCR) Workbook from AWS Artifact, a self-service portal for you to access AWS compliance reports.

Overview and applicability

The RBNZ’s Guidance sets out the RBNZ’s expectations for management of cyber resilience. It’s aimed at all registered banks, licensed non-bank deposit takers, licensed insurers, and designated financial market infrastructures that are regulated by the RBNZ. The Guidance makes a series of non-binding recommendations across four domains—Governance, Capability Building, Information Sharing, and Third-Party Management.

Each section of the Guidance has a short preamble, summarizing the RBNZ’s expectations for effective risk management in each domain and providing insights into why the RBNZ is making specific recommendations.

The Guidance can be tailored to an entity’s individual needs, technology choices, and risk appetite. Boards, management, and technology decision-makers should familiarize themselves with the RBNZ’s Guidance, ascertain how closely their own organization aligns to it, and work to remediate any identified gaps.

Why non-binding guidance and not an enforceable standard?

The RBNZ gives several reasons (see RBNZ Summary of submissions, paragraphs 9-16) for choosing to publish non-binding recommendations rather than legally binding requirements. The RBNZ declares an intent to monitor adoption of its recommendations by industry, and indicates that future policy settings might include developing legally binding standards for cyber resilience. In this respect, the RBNZ’s approach is similar to that of the Australian Prudential Regulation Authority (APRA), which first issued non-binding guidance on management of IT security risk in 2013, before moving to a legally binding standard in 2019.

The RBNZ gives the following reasons for choosing guidance over a standard:

• The RBNZ’s policy stance of being moderately active in respect to cyber resilience
• A previous light-touch approach regarding cyber resilience
• Providing sufficient time for industry to adjust to new policy settings, given the wide range of maturity within financial services organizations in New Zealand
• The gap between New Zealand’s and other jurisdictions’ cyber readiness
• The RBNZ’s current ability to effectively monitor and ensure compliance

The RBNZ indicates that it will “work together with the industry to operationalise the finalised Guidance” (RBNZ Summary of submissions, paragraph 10) and that it is “looking to strengthen [its] cyber resilience expertise in [its] financial stability function” although this will “take time to achieve” (RBNZ Summary of submissions, paragraph 9).

RBNZ-regulated entities should already be self-assessing against the Guidance and working to address gaps as a matter of priority. This is not just because the Guidance could become a legally binding standard in the next 3–5 years, but because the RBNZ has created a practical and flexible framework for the management of cyber risk, which will greatly enhance the NZ financial sector’s resilience to cyber incidents. Non–RBNZ-regulated entities looking for a benchmark to measure themselves against can also use the RBNZ’s Guidance to assess and improve the effectiveness of their own control environments.

Comparing rules-based frameworks and principles-based frameworks

There are two main ways that regulators communicate their risk management expectations to their regulated entities. These are a rules-based approach (sometimes called a compliance-based approach) and a principles-based approach. The RBNZ’s Guidance takes a principles-based approach towards the management of cyber risk.

With a rules-based approach, the regulator takes responsibility for identifying risks and lays out explicit and granular controls that regulated entities are required to implement. A rules-based approach is highly prescriptive, meaning that regulated entities can adopt a checklist approach in meeting their regulators’ requirements. This approach, although it gives certainty to regulated entities regarding the controls they are expected to adopt, can have disadvantages for regulators:

• Creating and maintaining detailed technical rules can be challenging, given the pace at which technology and the threat environment evolve.
• Regulators have a diverse population of regulated entities, so a rules-based approach can be inflexible or have blind spots.
• A rules-based approach doesn’t encourage entities to actively identify and manage their own unique set of risks.

By contrast, a principles-based approach describes a set of desired regulatory or risk-management outcomes, but it isn’t prescriptive in how regulated entities achieve these goals. Regulators act in a vendor- and technology-neutral manner, and regulated entities are expected to interpret regulatory requirements or guidance in the context of their individual business models, technology choices, threat environments, and risk appetites.

Under a principles-based approach, an entity must be able to demonstrate to its regulators’ satisfaction that it both understands the current and emerging risks it faces, and that it is managing these risks appropriately. For example, the principle that entities “[…] should develop and maintain a programme for continuing cyber resilience training for staff at all levels” (Guidance, section A3.3 page 6) gives clear direction, but leaves it up to the entity to decide on the approach to take, and how the entity will demonstrate to the RBNZ that this principle is being met.

A principles-based approach avoids the issues with the rules-based approach that I outlined previously—this approach is significantly longer-lived than a rules-based approach, it moves responsibility for effective risk identification and management from the regulator to the entity (which better understands its own risk profile and appetite), and the framework can be applied to a regulated entity population that varies in size, nature, and complexity.

Freedom to innovate under a principles-based approach

The RBNZ says that its Guidance should be employed in a manner “[…] proportionate to the size, structure and operational environment of an entity, as well as the nature, scope, complexity and risk profile of its products and services” (Guidance, page 2).

You can therefore meet the RBNZ’s Guidance in many different ways, as long as you can demonstrate to the RBNZ that your organization understands the risks it is facing and is managing them appropriately. A principles-based approach creates opportunities for innovation, because there are many different ways to meet a set of regulatory principles.

If you are an NZ financial services customer who also operates in Australia, you might note that the RBNZ’s approach aligns to that of the principal financial services regulator in Australia—the Australian Prudential Regulation Authority (APRA). APRA also takes a principles-based approach to its prudential framework, “avoiding excessive prescription where possible to allow for the diversity of practice according to the size, business activity, and sophistication of the institutions being supervised” (APRA’s objectives, Chapter 1).

A cautious green light to the cloud for New Zealand financial services

“If used prudently, third-party services may reduce an entity’s cyber risk, especially for those entities that lack cyber expertise” (Guidance, page 14).

In my view, this statement represents a (cautious) green light for financial services customers in NZ who wish to migrate systems to the AWS Cloud, although as the RBNZ makes clear, you “should be fully aware of the cyber risk associated with third parties and act appropriately to mitigate that risk” (Guidance, page 14). The RBNZ also requests that for critical functions, entities “[…] should inform the Reserve Bank about their outsourcing of critical functions to cloud service providers early in their decision-making process” (Guidance, Section D8.1, page 17).

The RBNZ defines a critical function as “[a]ny activity, function, process, or service, the loss of which (for even a short period of time) would materially affect the continued operation of an entity, the market it serves and the broader financial system, and/or materially affect the data integrity, reputation of an entity and confidence in the financial system” (Guidance, page 19).

Although the RBNZ doesn’t elaborate further on why it requests early notification about outsourcing of critical functions to the cloud, it’s likely that early engagement is requested so that the RBNZ has the opportunity to provide early feedback on any areas of potential concern, before the initiative is significantly progressed and a large amount of resources are committed.

Migration of higher-risk workloads to the cloud will naturally attract higher levels of regulatory scrutiny, but this doesn’t change the RBNZ’s open regulatory stance on cloud security. This stance is further emphasized by the RBNZ’s comment that “If managed prudently, migrating to the cloud presents a number of benefits including geographically dispersed infrastructures, agility to scale more quickly, improved automation, sufficient redundancy, and reduced initial investment costs for individual financial institutions” (Guidance, page 15).

Building innovative, secure, and highly resilient solutions on AWS, and using the high levels of visibility that you have into your environments that are running on AWS, can help you demonstrate to your regulators how you are identifying and managing your cyber resilience risks in line with the RBNZ’s Guidance.

A note on regulatory myths

In conversations with customers, I occasionally encounter “regulatory myths,” such as “certain types of workloads are prohibited in the cloud,” or “my regulator won’t allow me to use multi-region architectures.”

To date, the RBNZ has not made specific recommendations or set specific requirements regarding technology solutions. This includes, but is not limited to, choice of vendors or technology platforms, prescription of particular architectures, or the types of workload that may or may not be migrated to the cloud. Remember, the RBNZ’s Guidance is a principles-based framework, and is vendor-, technology-, and solution-neutral.

We have many examples of financial services companies all over the world successfully running critical workloads in the AWS Cloud, but regulatory myths and misunderstandings can inhibit our customers’ ability to “think big” when developing their cloud strategies. If you believe that you must implement specific technical patterns to meet regulatory expectations, we encourage you to contact the RBNZ to discuss any aspects of the Guidance that require clarification. We also encourage you to contact your AWS account team, who can arrange support from internal AWS risk and regulatory specialists, particularly if critical systems are proposed for migration to AWS.

Conclusion

The RBNZ’s Guidance on Cyber Resilience is an important first step for financial services regulation of cybersecurity in NZ. The Guidance can be considered cloud friendly because it acknowledges that prudent use of third parties (such as AWS) can reduce cyber risk, especially for entities that lack cyber expertise, and outlines several benefits of the cloud over traditional on-premises infrastructure, including resilience and redundancy, ability to scale, and reduced initial investment costs.

The principles-based nature of the RBNZ’s Guidance creates opportunities for you to develop innovative solutions in the AWS Cloud, because there are many different ways to meet the principles contained in the RBNZ’s Guidance. The key consideration is that you demonstrate to your regulators that you both understand the cyber risks you face in moving to the AWS Cloud, and manage them appropriately.

The launch of the AWS Asia Pacific (Auckland) Region in 2024, our wide range of products and services, and the visibility that you have into the AWS control environment (through AWS Artifact) and your own environment (through services like Amazon GuardDuty and AWS Security Hub) can all help you demonstrate to the RBNZ that you are managing cyber risk in accordance with the RBNZ’s expectations.

Next steps

Boards, executives, and technology decision-makers should familiarize themselves with the RBNZ’s Guidance, and if they aren’t already doing so, conduct a self-assessment and initiate a body of work to address identified gaps.

In view of the RBNZ’s cautious green light for prudent migration to the cloud—including for critical systems—NZ financial services customers should review their existing cloud strategies and identify areas where they can both broaden and accelerate their cloud journeys. The AWS Cloud Adoption Framework (AWS CAF) offers guidance and best practices to help organizations develop an efficient and effective plan for their cloud adoption journey. The AWS C-suite Guide to Shared Responsibility for Cloud Security and Data Safe Cloud eBook inform boards and senior management about both the benefits and risks of operating in the cloud.

Operational technology staff and risk practitioners can download our New Zealand Financial Service whitepaper from our public website and the AWS Reserve Bank of New Zealand Guidance on Cyber Resilience (RBNZ-GCR) Workbook from AWS Artifact. The RBNZ-GCR is particularly useful for operational IT staff and risk practitioners because it provides prescriptive guidance on which controls to implement on your side of the shared responsibility model and which AWS controls you inherit from the service.

Finally, contact your AWS representative to discuss how the AWS Partner Network, AWS solution architects, AWS Professional Services teams, and AWS Training and Certification can assist with your cloud adoption journey. If you don’t have an AWS representative, contact us at https://aws.amazon.com/contact-us.

 
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