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Choppy Regulatory Waters ahead for EU SMEs?

There's been a reasonable amount of coverage of the (proposed) dataprotection legal framework changes for the European Union, which the EuropeanCommission summarizes [1] as:

The legal framework consists of two legislative proposals:

  • A proposal for a Regulation of the European Parliament and of theCouncil on the protection of individuals with regard to the processing ofpersonal data and on the free movement of such data (General Data ProtectionRegulation), and
  • A proposal for a Directive of the European Parliament and of theCouncil on the protection of individuals with regard to the processing ofpersonal data by competent authorities for the purposes of prevention,investigation, detection or prosecution of criminal offences or the executionof criminal penalties, and the free movement of such dat

The regulation piece consists of multiple articles that define its scope,the fundamental principles of the regulation, the rights of data subjects aswell as the responsibilities for data processors and controllers.

It includes interesting requirements for businesses, such as:

  • Obligatory implementation of appropriate measures for the security of personal dataprocessing;
    • Obligatory notification to the relevant national supervisory body(e.g. the ICO in the UK, see: www.ico.gov.uk) and to the affected individuals,when personal data breaches occur.

      Its not just large organizations and publicbodies that will be impacted when the Regulation comes into force (subject to amendments prior to its enaction), the commission expressly states that theregulation will provide a consistent level of protection for individualsthrough "legal certainty and transparency for economic operators, includingmicro, small and medium-sized enterprises".

      Whilst not all micro, small and medium-sized enterprises process, store or transmit personal data - its safe to say a substantial number do. Will new legal requirements berealistic for smaller businesses?

      Given there are 23m entities defined as micro,small, and medium-sized enterprises in the EU, and that they account for 99% ofall enterprises across the 27 EU member states [2] – it would be counterproductiveto the Commission's objectives for the Regulation to be watered-down too much for smaller firms.

      On the other hand, approximately 9 of 10 (of the23m) fall into the micro category, i.e. less than 10 employeesand sub-2m Euro revenues [3]; where the ability to comply with (even basic) new regulatory requirements is not straightforward. (Awareness of a requirement, deadlines for compliance, and potential costs, are not new issues with respect to compliance).

      Sensibly the proposal places some of the responsibility for raisingawareness on the relevant national supervisory authorities. This includes bothpublic awareness as well as "specific measures directed at controllers andprocessors, including micro, small andmedium-sized enterprises".

      Given that its only at proposal stage, there is scope for changes to be made prior to it coming into effect. For instance, the Bar Council of England and Wales recommended that the Commission consider custodial sentences for the most serious breaches of dataprotection. Which when combined with mandatory disclosure adds an interesting dimension to director liability forbusinesses. [4]

      The debate on what preciselyconstitutes personal data continues. A number of organizations have raised concerns thatmoving away from a "general definition" of personal data toward more prescriptiverequirements, would result in the Regulation being unable to deal with evolving technology. In either case, smaller businesses will need more prescriptive guidance from the national supervisory authorities if they are realtistically expected to comply.

      The proposed regulation does consider the specific nature of micro,small and medium sized enterprises with a handful of derogations. But right now its difficult to foresee the scale ofthe impact to smaller businesses at this stage. In part that will be down to the national supervisory authorities and how aggressively they pursue enforcement/fines. Assuming they do, it could mean:

      1) The (possibility of) potential director liability and the (likely)requirement for mandatory breach disclosure may mean businesses are forced to implement appropriate technical security controls and documenting appropriate levels of due-diligence, which will introduce newcosts and/or be a new concept for smaller businesses.

      2) This will likely provide additional motivation for smaller businesses to outsource personal datastorage, processing and transmission to expert 3rd party providers.Inevitably, as we've seen with our own Global Security Report, outsourcing to insecure 3rd parties is acommon problem for smaller businsses, and the risk-transfer benefit is often either overstated and/ormisunderstood.

      3) The inherent uncertainties may potentially give rise to somewhat morequantitative risk-transfer through specialist cyber insurance. Althoughinsuring against the fines themselves would introduce an element of moralhazard, insuring against the following items may become more commonplace:

        • The business interruption(loss in revenue) as a result of a cyber incident; and/or
        • The potential downturn insales following breach disclosure as a result of a loss in customer confidence;and/or
        • The cost of 3rdparty digital forensic/incident response work required to assess the impact of abreach.

          As a final note, the Regulation may be a catalyst for broad-based review ofnational cyber crime laws, such as the UK's Computer Misuse Act (and itshandful of updates) as there are surprisingly few prosecutions proceeded against, under these types of laws across member states. (At least when considering the past few years worth of increases in reported cybercrime and public awareness thereof [5]).

          [1] The regulation draft - http://bit.ly/xNQK8P

          [2] EU SME stats - http://bit.ly/bGliKz

          [3] EU SME definition - http://bit.ly/89DRo0

          [4] Bar Council of England and Wales Response- http://bit.ly/10NwvmT

          [5] ... there's a number of reasons for this, but that's bestexplored in a follow up post