December 01, 2023

Data protection in the financial services industry

Data protection in the financial services industry

Financial data processing within a jurisdiction and cross-border is subject to a broad range of constantly evolving laws and regulations worldwide. Leaders in financial services information technology have to keep track of an ever-increasing number of data privacy laws and evaluate these individually for business and processing impacts.

This article will discuss some of these measures, including financial data protection laws and data residency requirements, and also explain how InCountry can help with financial data compliance.

Context of data protection in financial companies

According to Statista, the financial services industry in the US is the second-most targeted industry for cyber-attacks. Financial institutions, ranging from banks to investment firms, handle an enormous amount of personal and financial data. This includes not only bank account details but also information about transactions, investments, credit history, and more. As a result, these entities become custodians of highly sensitive data that, if compromised, can lead to severe consequences for their customers and the company itself.

The sheer magnitude of data held by financial entities necessitates robust security measures at every level.

The major focus of data protection in the financial services industry is as follows:

  • Compliance:  The goal here is to ensure that financial companies follow the data protection laws governing the territory they operate, as they conduct their business. For instance, financial companies operating in Europe will be expected to comply with the GDPR, which is the dominant data protection regulation in Europe and applies to financial services data compliance.
  • Security: The next focus here is providing adequate security measures for the personal data of customers that are being stored and processed by financial companies.

Other financial services data protection measures a company may employ for security include data minimization, training staff on data security policies and best practices, and having a data breach response plan.

Why is data residency important?

Data residency refers to the physical or geographical location where data is stored and processed. For financial services companies, ensuring that this data remains within specific jurisdictions or regions is paramount as it is often required by law.

Data residency and data protection are intertwined concepts both aimed at ensuring the safety and ethical use of critical user data.

Here is why financial services companies must adhere to data residency regulations;

  1. Legal compliance

Various countries have stringent data protection laws that mandate where certain types of data should reside. For instance, the European Union’s General Data Protection Regulation (GDPR) requires companies to store personal data of EU citizens within the EU or in regions with equivalent privacy standards. Non-compliance can result in hefty fines, damaged reputation, and legal consequences. So, ensuring data stays within specified jurisdictions is a must.

  1. Data protection and security

Data residency isn’t just about following rules; it’s about safeguarding sensitive information. By storing data in specific regions, companies can adhere to stringent security measures and data protection laws of that area. This helps in mitigating the risk of unauthorized access, data breaches, and cyber threats. Additionally, some regions have more robust infrastructure and security protocols, offering an added layer of protection to sensitive financial data.

  1. Building trust and customer confidence

Imagine you’re a customer entrusting your financial details to an institution. Knowing that your data is stored securely in line with regulatory standards gives you peace of mind. Data residency helps financial firms demonstrate their commitment to protecting client information, thereby building trust and confidence among customers.

  1. Enhanced control and governance

Having a clear understanding of where data resides enables better control and governance. It helps in managing the data lifecycle, ensuring compliance with retention policies, and facilitating efficient responses to legal or regulatory inquiries.

  1. Operational continuity

By adhering to data residency requirements, financial services companies can ensure operational continuity. They minimize the risk of disruptions caused by legal disputes or regulatory issues regarding data storage.

  1. Cross-border data transfers

In a globally connected world, financial institutions often need to transfer data across borders for various reasons like international transactions or collaborations. Adhering to data residency rules is critical during these transfers to ensure that data remains protected and compliant throughout.

Financial data protection laws you should know

Almost every territory has a body of financial data protection laws they operate with. However, in this section, we will limit our discussion to the following laws:

  • The Gramm-Leach-Bliley Act (GLBA) in the United States.
  • The General Data Protection Regulation (GDPR) in the European Union.
  • The Payment Card Industry Data Security Standard (PCI DSS).
  • The Digital Personal Data Protection Act (DPDPA) in India.

The Gramm-Leach-Bliley Act (GLBA) in the United States

Alternatively recognized as the Financial Services Modernization Act of 1999, it is a federal law in the US aimed at safeguarding the personal financial information of consumers retained by financial institutions. Its principal objective is to improve consumer privacy and uphold the security of confidential financial data. Some of the provisions of this act are as follows:

  • Financial privacy rule

It requires financial institutions to inform clients of all information-sharing activities and allow them to opt out of having their private personal data shared with a third party. 

  • Safeguards rule

This rule requires financial institutions to create and implement a robust information security program. This program is designed to ensure the confidentiality and integrity of customer information. It encompasses a range of safeguards, including administrative, technical, and physical measures, all aimed at securing customer records and information. 

  • Pretexting provisions

The GLBA addresses the incidence of Pretexting, a deceptive practice involving the use of false pretenses to acquire an individual’s personal financial information. This act explicitly forbids the acquisition of customer information through false pretenses and the utilization of false statements to obtain such information from a financial institution. 

  • Enforcement

The GLBA designates enforcement responsibilities across multiple federal agencies, such as the Federal Trade Commission (FTC), federal banking agencies, and other regulatory bodies based on the specific type of financial institution. These agencies possess the authority to conduct examinations of financial institutions to ensure compliance with the privacy and security requirements outlined in the GLBA. 

  • Penalties

Financial institutions that violate any section of the GLBA could face civil penalties from any of the enforcement agencies listed above.

To learn more about the Gramm-Leach-Bliley Act, you may want to check out this resource.

The General Data Protection Regulation (GDPR)

The GDPR stands as a cornerstone in EU law concerning data protection and privacy. It applies to both the European Union (EU) and the European Economic Area (EEA). It addresses the cross-border transfer of personal data. The GDPR holds a primary objective of restoring control to citizens and residents over their personal data while concurrently streamlining the regulatory landscape for global businesses through standardized regulations within the EU. 

Under the GDPR, both public and private entities operating within the EU are subject to regulations governing the processing of personal data, including its transfer beyond EU borders. The regulation significantly empowers individuals by granting them more authority over their personal data, and it imposes heightened transparency requirements on organizations, compelling them to provide clearer insights into how they collect and utilize personal information. The provisions of this policy are as follows:

  • Rights of data subjects

This policy outlines the rights of private individuals that their data is being collected, and processed by organizations within the EU. The rights are discussed as follows:

  • Right of access

It emphasizes the right of individuals to access their personal data being held by an organization at any time.

  • Right to rectify personal data

It provides individuals with the right to request the modification or correction of their personal information being held by an organization.

  • Right to delete personal information

It gives Individuals the right to request that an organization should delete the personal information in their custody, and the organization has no other option but to comply.

  • Restrictions to processing personal data

Individuals have the right to restrict the processing of their personal data if the need arises for that.

  • Right to object

Individuals are given the right to object to the processing of their personal data for any purpose they are uncomfortable with.

  • Right to data portability

Individuals possess the right to request and receive their personal data from one organization and transfer it to another organization in a machine-readable format.

  • Obtaining consent

It requires organizations to obtain full consent from individuals before processing and storing their personal information.

  • Security safeguards

It requires organizations to implement appropriate security protocols to ensure the safety of the data of clients in their database.

  • Reporting breaches

Organizations are required to report all data breaches within 72 hours after they occur. This report should be sent to the appropriate authorities and affected individuals.

  • Penalties for noncompliance

The penalties for defaulting the provisions of this policy can be as high as 4% of the annual revenue of the company or €20 million, whichever is greater.

For more details on the European General Data Protection Regulation, visit here.

The Payment Card Industry Data Security Standard (PCI DSS)

This regulation consists of a set of security standards meticulously crafted to guarantee the establishment and maintenance of a secure environment for companies engaged in accepting, processing, storing, or transmitting credit card information. The overarching objective of PCI DSS is to safeguard cardholder data, thereby mitigating the potential risks associated with data breaches and fraudulent activities. This standard is the result of a collaborative initiative involving prominent credit card companies such as Visa, MasterCard, American Express, Discover, and JCB, underscoring a collective commitment to fortify the security measures surrounding sensitive credit card information. Here are the key requirements of the PCI DSS:

  • Build and maintain a secure network

It requires financial service companies to install and maintain a solid firewall configuration to protect the cardholder’s data. Financial companies are also forbidden from using vendor-supplied default passwords as system passwords and for other security protocols.

  • Protect cardholder data

Ensure the security of stored cardholder data by employing encryption or other robust methods of protection. When displaying the Primary Account Number (PAN), implement masking techniques, and restrict access to cardholder data only to those with a genuine need to know. 

  • Maintain a vulnerability management program

Focuses on the continuous development and maintenance of secure systems and applications. 

  • Maintain an information security policy

A detailed policy on information security should be prepared and made available for all staff involved in the process of handling clients’ personal data, to improve compliance rate.

  • Validation and compliance

Merchants and service providers must undergo regular assessments to confirm their adherence to PCI DSS. This validation process includes self-assessment questionnaires, external audits conducted by Qualified Security Assessors (QSAs), and quarterly network scanning. 

Other provisions found in the PCI DSS are extensively discussed here.

The Digital Personal Data Protection Act (DPDPA) in India

The Digital Personal Data Protection Act, of 2023 (DPDPA) represents India’s inaugural and comprehensive data protection legislation. Published in the Official Gazette on August 11, 2023, the precise date of its enforcement is still pending an official announcement by the government.

The scope of the DPDPA encompasses the processing of digital personal data within India. Additionally, it extends its jurisdiction to the processing of such data outside India, specifically when associated with offering goods or services within the country. Digital personal data, as per the DPDPA, encompasses any information linked to an identifiable individual, whether directly or indirectly, derived from the data or other information in the possession or likely to come into the possession of the data fiduciary.

Individual rights provided by the DPDPA are as follows:

  • Access: They have the right to access their digital personal data.
  • Correction: Individuals can correct any inaccuracies present in their digital personal data.
  • Erasure: The DPDPA grants the right to request the erasure of their digital personal data.
  • Restriction: Individuals have the authority to restrict the processing of their digital personal data.
  • Portability: The law enables them to port their digital personal data to another data fiduciary.
  • Objection: Individuals can object to the processing of their digital personal data for specific purposes.

The Obligations of organizations under the DPDPA are as follows:

  • Obtaining consent: Before processing digital personal data, data fiduciaries must obtain consent from the individuals involved.
  • Security measures: It is imperative to implement suitable security measures to safeguard digital personal data, preventing unauthorized access, use, or disclosure.
  • Privacy policy disclosure: Data fiduciaries are required to disclose their privacy policies to individuals, ensuring transparency in how their personal data is handled.
  • Data breach reporting: In the event of data breaches, prompt reporting to the Data Protection Authority (DPA) is mandatory under the DPDPA.

Please note the data protection laws governing the location where your financial service company serves is also important financial services data privacy law you should be familiar with. In case the data privacy laws of your region have not been captured so far, do well to visit our blog to pick out the data protection laws applicable to your territory, and follow them accordingly.

Main challenges regarding data residency in the industry

The following are some of the challenges associated with data residency in the financial industry:

  • Varying data residency requirements

One of the primary challenges for financial services firms is navigating the maze of regulatory compliance. Different regions and countries have their own stringent data residency laws and regulations. This means financial institutions often find themselves entangled in a web of varying requirements on where and how data should be stored. For instance, the European Union’s GDPR demands strict data protection measures, while other countries might have different guidelines. Complying with this multitude of regulations while ensuring seamless service delivery is no mean feat.

  • Cross-Border data transfers

The global nature of finance often necessitates the transfer of data across borders. However, conflicting data residency laws and regulations in different jurisdictions can impede these transfers, leading to compliance risks and complexities.

  • Security concerns

Ensuring data security and integrity is a constant battle. Different regions may have varying standards and practices for safeguarding data, making it challenging to maintain a consistent and high level of security across all locations where data resides.

  • Cost and resource allocation

Complying with data residency requirements often demands significant financial investment. Building or leasing data centers in multiple locations, implementing compliant technologies, and hiring skilled personnel to manage these setups can escalate costs. This poses a challenge, especially for smaller financial firms with limited resources.

  • Data sovereignty

Many countries advocate for data sovereignty, the idea that data about a country’s citizens should be stored within its borders. This can clash with globalized financial services that rely on centralized data storage and processing for efficiency.

  • Security and data protection

Security is paramount in the financial world. When data is stored or transmitted across borders, it becomes susceptible to different laws, security standards, and potential breaches. Ensuring data protection and maintaining high-security standards in diverse locations is no walk in the park. One breach could lead to severe consequences, damaging trust and incurring hefty penalties across multiple jurisdictions.

Expert tip: Leveraging tech solutions

Amid these challenges, financial services firms grapple with delivering core services while complying with data residency mandates. However, the solution lies in collaboration. Tech companies, such as Incountry, specialize in addressing data residency requirements for various industries, including financial services.

These dedicated entities have built robust infrastructure and solutions explicitly tailored to ensure compliance across borders while maintaining operational efficiency. Leveraging such expertise allows financial institutions to focus on their core offerings while leaving the intricate web of data residency compliance in capable hands.

Cross-border rules for financial service companies

Cross-border rules for financial service companies are critical guidelines that govern operations and transactions that take place between different countries. These rules are instrumental in ensuring the smooth functioning of financial services while maintaining regulatory compliance and safeguarding the interests of consumers.

While cross-border rules vary according to jurisdictions, here are some general guidelines that inform these rules and give you an insight into what is obtainable in the financial services sector.

  • Licensing and regulations

Financial service companies must obtain proper licenses and authorizations to operate in foreign jurisdictions. Each country has its own regulatory authorities overseeing financial services, and obtaining the necessary licenses often involves meeting specific criteria related to capital reserves, operational capabilities, and compliance standards.

  • Compliance and consumer protection

Once you’ve got your licenses sorted, compliance becomes critical. Financial regulations across borders are as diverse as the cultures they represent. Ensuring compliance with anti-money laundering (AML) and know your customer (KYC) regulations is crucial. Moreover, understanding and adhering to local consumer protection laws is vital to building trust and maintaining a good reputation.

  • Data privacy and security

One of the major concerns for cross-border rules is ensuring data privacy and security. Many countries have their own set of data protection laws, which form part of the cross-border rules companies must follow. Compliance requires stringent data protection measures and may necessitate securing explicit consent from individuals before transferring their data internationally.

  • Supervision and reporting

Regulatory authorities in different countries supervise the activities of financial service companies to ensure compliance with local regulations. This oversight may involve regular reporting, audits, and inspections to assess the company’s operations and adherence to regulatory requirements.

  • Cross-border transactions and currency exchange

Managing cross-border transactions involves navigating various currencies, exchange rates, and transaction fees. Understanding the complexities of international payments is essential for providing efficient and cost-effective services to customers.

How InCountry helps financial companies stay compliant with data protection laws

Here at InCountry, we specialize in data residency solutions and helping organizations store and process their data in compliance with the local data protection and privacy laws in the country they operate. Our data Residency as a service is one way we can help your financial service company stay compliant. Through this service, we help you store your client’s data in the country of your choice while giving you access to the same data from any other location in the world. You can check here to learn more about our data residency for financial services

We also enable your financial service company to process data locally, addressing legal constraints on cross-border data transfers. With a network of over 100 local data processors, our facilities allow financial companies to process data in the same country where their customers reside, ensuring compliance with data protection laws. Our data encryption for all data in transit, or at rest, ensures your client’s data is protected from unauthorized access. What’s more, our team of compliance experts is available to help your financial service company stay compliant with all relevant policies and procedures.

Contact us today, let’s discuss your needs and help you stay compliant while ensuring maximum security for your client’s data.