What Finance Companies Need to Know About the FTC Safeguards Rule

Home » Blog » What Finance Companies Need to Know About the FTC Safeguards Rule

Thanks to the ever-growing number of reported cyberattacks, the need for regulatory compliance is crucial across all industries. In the financial sector, businesses face a burgeoning burden in staying compliant with more regulatory and reporting requirements to manage their cybersecurity risks. So, we’re here to discuss the FTC Safeguards Rule.

In today’s business world, non-compliance is not optional. According to the SEC, the average cost of regulatory non-compliance is $14.82 million. The figure is considerably higher than the average cost of regulatory compliance ($5.47 million).

If you own or manage a business in the financial sector, the Federal Trade Commission (FTC) Safeguards Rule is among the regulations you must meet. This article will discuss the FTC Safeguards Rule, its tenets, and how to comply with it. We will highlight how SOC 2 compliance can help you meet the FTC Guidelines.

Let’s get straight to it!

YouTube video

What is the FTC Safeguards Rule?

The FTC Safeguard Rule was enacted in 1999 and based on the Gramm-Leach-Bliley Act (GLBA). It aimed at safeguarding consumers by protecting their personally-identifiable information from misuse. The Safeguards Rule took effect in 2003 before getting amended in 2021 to ensure it keeps pace with tech advances.

Upon enactment, the FTC guidelines were primarily generic, with the government assuming that the affected businesses would do the right thing. Fast-forward, the rules got amended to make them clearer, more prescriptive, and more specific on what financial institutions must do when handling, processing, storing, and securing customers’ confidential data.

A photo of businesswomen colleagues working together on a laptop with a large screen on the background showing charts and graphs

Which Businesses are Covered by the FTC Safeguards Rule?

The FTC Safeguards Rule primarily applies to financial institutions. According to the FTC, these institutions engage in significant economic activities or activities incidental to these financial activities. Such businesses include payday lenders, mortgage lenders, mortgage brokers, finance companies, collection agencies, tax preparation firms, investment advisors, and credit unions. Generally, these companies aren’t mandated to register with the SEC.

Financial institutions covered under the Safeguards Rule must build, implement, and maintain information security programs with physical, technical, and administrative guidelines designed to safeguard customers’ information.  

How to Comply with the FTC Safeguards Rule

A financial institution can only comply with the Safeguards Rule if its information security program includes the nine critical tenets of the compliance standard. These elements are:

1. Security Officer

Your financial institution should designate a qualified individual to oversee the information security program. The individual can be an employee or a managed IT services provider and should maintain accountability for your FTC Safeguards Rule compliance stance. In addition, this individual will be answerable from a liability perspective should something go wrong.

2. Risk Assessments

It’s foolhardy to create an information security program without auditing what you have and where you’ve stored it. For this reason, you need risk assessments to pinpoint foreseeable internal and external threats to customer information confidentiality, integrity, and security. The written risk assessment must incorporate criteria for evaluating your risks and threats.

3. Design Safeguards for Controlling Your Risks

A critical element of the Safeguards Rule is designing and implementing measures for controlling risks identified during your risk assessment. In this regard, your financial institution must:

  • Implement and review access controls periodically.
  • Know what data you have and its storage location.
  • Encrypt customer information when in your system and transit.
  • Implement procedures for access to proprietary and third-party apps that you use to access, store, or transmit customer data.
  • Implement multi-factor authentication for anyone with access to customer information.
  • Dispose of customer data securely, no later than two years from your most recent use.
  • Keep a log of authorized users’ activity and monitor unauthorized system access.

4. Monitor and Test Your Safeguards’ Effectiveness Regularly

You should regularly test your threat detection procedures. An easy way to do so is through continuous system monitoring. Annual penetration testing and vulnerability assessments can also help. You may also want to test your information security system’s resilience when changing your business arrangements and operations. Since doing all this yourself can be overwhelming, a managed services provider is handy.

5. Employee Training

A financial institution’s IT security program is only as good as its least vigilant employee. Employees are your last line of defense against cyberattacks, thus a need to train them to spot threats. Including information security training in your overall IT security program will enable your employees to keep their ears on the ground to pinpoint emerging threats and countermeasures.

6. Assess Your Service Providers

Robust information security is needless if third-party service providers have weak cybersecurity measures. In this regard, monitor service providers closely. Only engage those with the requisite safeguards. In addition, your service-level agreements must outline your security expectations.

7. Keep Your IT Security Program Current

Change is undoubtedly the only constant regarding information security. At some point, you’ll need to change your operational setup, personnel, how you conduct risk assessments, and more. Your information security framework should be flexible enough to accommodate these periodic changes.

8. Create a Response Plan

With cybercrime on the rise, facing an attack is a matter of when not if. That’s particularly true for financial institutions, thus the need for a disaster response and recovery plan in a security event. In this regard, Section 314.4(h) of the FTC Safeguards Rule highlights that a financial institution’s recovery plan should cover the following:

  • The goals of the disaster response and recovery plan.
  • The internal processes that come into play in response to security events.
  • Roles, responsibilities, and levels of decision-making individuals.
  • Information-sharing with relevant stakeholders.
  • Procedures for mitigating weaknesses that led to the security event.
  • The process of documenting and reporting the security event.

9. Reporting to Your Company’s Board

The individual appointed to oversee the information security program is required to report to your financial institution’s Board of Directors. It should be in writing and at least annually. The report must include an assessment of the organization’s information security stance besides covering topics related to the program.

FTC Safeguards Rule vis a vis. SOC2 2 Compliance

People often confuse the FTC Safeguards Rule and SOC 2 compliance. It could be because both frameworks aim to protect sensitive information and data. Though related, the frameworks are different.

The FTC Safeguards Rule is a set of regulations created to safeguard customer information held by financial institutions. Also, the FTC Safeguards Rule requires financial institutions to develop, implement, and maintain a comprehensive information security program to protect customer information. Under the FTC Guidelines, financial institutions should conduct regular risk assessments and use appropriate safeguards to protect customer information.

In addition, the Safeguards Rule specifies what to include in an information security program, such as designating one or more employees to coordinate the program, identifying and assessing the risks to customer information, and implementing safeguards to control those risks.

On the other hand, SOC 2 compliance is a standard created by the American Institute of Certified Public Accountants (AICPA) to ensure that service providers are securely managing data and protecting the privacy of their clients. SOC 2 compliance involves an independent audit of the service provider’s controls over customer data security, availability, processing integrity, confidentiality, and privacy.

Can SOC 2 Compliance Help Me Comply with the FTC Safeguards Rule?

Arguably, this is one of the questions that will run through your mind when looking to meet the FTC Guidelines.

Indeed, SOC 2 compliance can help your financial institution to comply with the FTC Safeguards Rule. In addition, the Safeguards Rule requires financial institutions to develop, implement, and maintain a comprehensive information security program appropriate to the size and complexity of the organization and the nature and scope of its activities. SOC 2 compliance can provide an independent evaluation of an organization’s controls related to security, availability, processing integrity, confidentiality, and privacy.

By undergoing a SOC 2 audit, your financial institution can demonstrate that it has implemented appropriate controls to protect sensitive information. SOC 2 compliance can also help you identify areas for improvement in its information security program. A SOC 2 audit thoroughly evaluates an organization’s information systems and controls. By addressing these issues, an organization can improve its overall information security program and better meet the requirements of the FTC Safeguards Rule.

Nonetheless, while SOC 2 compliance can help demonstrate compliance with certain aspects of the FTC Safeguards Rule, it may not be sufficient to meet all of the Rule’s requirements. The Safeguards Rule is a specific regulation that applies to financial institutions, and compliance may require additional measures beyond what is covered by a SOC 2 audit. In this regard, your financial institution needs an MSP partner to ensure it meets all applicable requirements.

Get Help with FTC Safeguards Rule Compliance

Like other regulatory requirements, complying with FTC guidelines can be complicated. A lot of stuff should be done for your financial institution to achieve compliance.

Further down the line, you must stay apprised of any regulatory changes to maintain your compliance status.

This can be daunting, so you need a reliable MSP partner like NetTech. We have a proven track record of helping financial institutions to build their information security programs, and we look forward to helping you navigate the compliance world. Contact us to learn more.

The NetTech Content Team

NetTech Consultants is a Jacksonville based managed IT services provider that serves SMBs and organizations in Southeast Georgia and Northeast Florida. NetTech publishes content discussing information technology and cybersecurity concepts and trends in a business context.