Third-Party Risk Management for Regulatory Compliance (NIS2, GDPR, and DORA)

In today’s interconnected business landscape, organisations increasingly rely on third-party vendors and service providers to support their operations. However, this reliance exposes them to additional cybersecurity and privacy risks, as third parties may have access to critical systems and sensitive data. Recognising this, regulations such as the NIS2 Directive, General Data Protection Regulation (GDPR), and Digital Operational Resilience Act (DORA) impose strict requirements for third-party risk management (TPRM).

This article explores how organisations can manage third-party risks to meet compliance obligations under these regulatory frameworks, covering risk assessment, contract management, ongoing monitoring, and best practices for third-party oversight.

1. Why is Third-Party Risk Management Important?

Third-party vendors, including IT service providers, cloud platforms, and data processors, can be a significant security vulnerability. A security breach or data mishandling by a third party can result in:

• Data breaches that compromise personal and business-critical information.

• Operational disruptions affecting the availability of essential services.

• Regulatory non-compliance, leading to fines, penalties, and reputational damage.

Effective third-party risk management helps organisations mitigate these risks and demonstrate compliance with regulatory standards.

2. Third-Party Risk Management Requirements Under NIS2, GDPR, and DORA

2.1. NIS2 Directive

The NIS2 Directive applies to essential and important service providers in sectors such as energy, healthcare, financial services, and transportation. It requires organisations to secure their entire supply chain, including third-party ICT providers.

Key requirements:

• Identify and assess risks posed by third-party vendors.

• Ensure that third parties implement technical and organisational measures to protect systems and data.

• Establish procedures for ongoing monitoring and risk mitigation.

• Share information on incidents and threats with relevant authorities.

Failure to manage third-party risks under NIS2 can lead to service disruptions and regulatory penalties.

2.2. General Data Protection Regulation (GDPR)

The GDPR governs the processing of personal data and applies to both data controllers and data processors. It requires organisations to ensure that third-party processors adhere to data protection obligations.

Key requirements:

• Conduct due diligence to verify that third parties can meet GDPR’s security standards.

• Implement Data Processing Agreements (DPAs) that define the roles, responsibilities, and security measures required of processors.

• Monitor and audit third-party compliance with data protection requirements.

• Ensure that processors report data breaches within established timeframes.

Non-compliance with GDPR’s third-party requirements can result in fines of up to €20 million or 4% of global annual turnover.

2.3. Digital Operational Resilience Act (DORA)

The Digital Operational Resilience Act (DORA) focuses on strengthening the operational resilience of financial institutions and ICT service providers. It imposes strict oversight requirements for third-party relationships.

Key requirements:

• Identify critical third-party ICT providers that are essential to business operations.

• Implement risk management frameworks to assess and mitigate risks from these providers.

• Include security, audit, and incident response clauses in contracts with third parties.

• Perform regular audits and scenario-based resilience testing of critical third parties.

• Report incidents involving third parties to national authorities within 24 hours.

Under DORA, failure to manage third-party risks can disrupt financial services and result in regulatory sanctions.

3. Steps to Implement Effective Third-Party Risk Management

Organisations can follow a structured approach to manage third-party risks effectively and ensure compliance with NIS2, GDPR, and DORA.

Step 1: Identify and Classify Third-Party Vendors

Begin by creating an inventory of all third-party vendors and classifying them based on the criticality of their services and the level of access they have to sensitive data or systems.

Vendor Classification Criteria:

• Access to personal data or critical infrastructure.

• Impact on business continuity and service availability.

• Frequency and scope of data transfers or system interactions.

Prioritise risk management efforts for high-risk vendors, such as cloud service providers, managed security services, and software developers.

Step 2: Conduct Third-Party Risk Assessments

Perform risk assessments to evaluate the security posture of third-party vendors. Assessments should focus on:

• Security Controls: Does the vendor have adequate measures in place to protect data and systems?

• Compliance: Does the vendor comply with relevant regulations (e.g., GDPR, NIS2)?

• Incident Response Capabilities: Can the vendor detect, report, and respond to incidents effectively?

• Data Protection Practices: How does the vendor handle personal data (e.g., encryption, access controls)?

Use questionnaires, audits, and vulnerability scans to gather information on the vendor’s risk profile.

Step 3: Establish Contractual Safeguards

Contracts with third-party vendors must include provisions to enforce security and compliance requirements. Key contractual elements include:

• Data Protection Clauses: Specify how personal data will be processed, stored, and transferred.

• Security Requirements: Define the minimum technical and organisational measures the vendor must implement (e.g., encryption, access controls).

• Audit Rights: Grant the organisation the right to conduct regular security audits of the vendor’s infrastructure.

• Incident Reporting: Require vendors to notify the organisation of security incidents within a specified timeframe.

• Termination Clauses: Outline the conditions under which the contract may be terminated for non-compliance.

For GDPR compliance, contracts with data processors must include Data Processing Agreements (DPAs).

Step 4: Monitor and Audit Third-Party Compliance

Ongoing monitoring is essential to ensure that vendors continue to meet security and compliance requirements. Regular audits, reviews, and security assessments should be conducted to verify compliance.

Monitoring Activities:

• Review security reports and certifications (e.g., ISO27001, SOC 2).

• Perform vulnerability scans and penetration tests on systems managed by third parties.

• Monitor for security incidents or data breaches involving third-party vendors.

• Assess the effectiveness of vendor security controls periodically.

Organisations can use automated tools to centralise third-party risk monitoring and reporting.

Step 5: Manage Incident Response and Communication

Establish procedures for managing incidents involving third-party vendors. These procedures should include:

• Incident Escalation: Define how and when incidents should be escalated to internal and external stakeholders.

• Vendor Coordination: Ensure that vendors collaborate with the organisation’s incident response team during investigations.

• Regulatory Reporting: Comply with reporting obligations under NIS2, GDPR, and DORA by notifying authorities within the required timeframes.

Conduct post-incident reviews to identify lessons learned and improve both internal and third-party security measures.

Step 6: Periodically Reassess Risks

Third-party risks may change over time due to evolving business needs, new threats, or changes in the vendor’s operations. Organisations should periodically reassess risks and update risk management strategies accordingly.

Key Triggers for Reassessment:

• Changes in the scope of services provided by the vendor.

• Discovery of new vulnerabilities or security incidents.

• Regulatory updates or new compliance requirements.

Regular risk assessments help organisations maintain an up-to-date understanding of their third-party risk exposure.

4. Best Practices for Third-Party Risk Management

To strengthen third-party risk management and ensure regulatory compliance, organisations should adopt the following best practices:

1. Establish a Centralised TPRM Programme:
   Develop a unified framework for managing third-party risks across the organisation.

2. Engage Stakeholders:
   Collaborate with legal, procurement, IT, and compliance teams to ensure that third-party contracts, risk assessments, and audits align with regulatory requirements.

3. Leverage Automation:
   Use TPRM platforms to streamline vendor assessments, monitoring, and reporting. Automation reduces manual effort and improves visibility into third-party risks.

4. Maintain Documentation:
   Keep detailed records of third-party risk assessments, audit findings, and contractual agreements. These records serve as evidence of compliance during regulatory audits.

5. Provide Training:
   Educate internal teams on the importance of third-party risk management and their role in maintaining compliance.

5. Conclusion

Effective third-party risk management is essential for organisations seeking to comply with NIS2, GDPR, and DORA. By identifying risks, implementing contractual safeguards, and continuously monitoring third-party security practices, organisations can reduce their exposure to cyber threats and regulatory penalties. A structured, proactive approach to TPRM not only supports compliance but also enhances overall cybersecurity resilience.

For expert guidance on third-party risk management, compliance audits, or vendor assessments, contact our cybersecurity specialists today.