Capital Markets Insights

Why ECM Teams Should Prioritize Data Security in Investment Banking

In 2019, both Capital One and Empire Life experienced data breaches where cybercriminals gained unauthorized access to systems containing the personal information of over 100 million clients. A few years earlier, in 2014, JPMorgan Chase experienced a significant data breach. Hackers accessed the bank's systems and compromised the personal information of approximately 83 million customers.

Compromised data typically includes names, addresses, credit scores, and Social Security numbers, which are then often sold on the dark web in batches to be exploited on a personal, individual basis, including phishing, fraud and identity theft.

While regulators issue millions of dollars in fines yearly–such as the $80 million fine to Capital One–the reputational damage from a data breach creates an even more devastating impact on customer trust.  

In investment banking, trust is the foundation of successful client relationships. Clients entrust their sensitive personal information to their financial services institutions, relying on them to safeguard it.

Unfortunately, adopting digital technologies is a double-edged sword, including rising cyber threats that often outpace IT Departments' expertise.  While keeping data and systems safe falls to IT Departments, ECM (Equity Capital Markets) teams should be deeply concerned about data security and how it affects client relationships.

In this post, we aim to shed light on the risks and consequences of data breaches in the investment banking industry and provide actionable steps ECM teams can take to enhance data security and mitigate potential threats.

Potential attack vectors for data breaches

To effectively understand the issue, ECM professionals should be familiar with the various types of data breaches that can occur.

Insider Threats:

Data breaches can arise from within an organization through the actions of employees, contractors, or partners. Insider threats can occur due to malicious intent or unintentional mistakes.

For example, malicious insiders may intentionally access and misuse confidential information for personal gain or to harm the organization. In contrast, accidental breaches can result from employee negligence, such as sharing sensitive data with unauthorized individuals or falling victim to social engineering tactics.

Physical Theft or Loss:

Data breaches are not limited to cyberattacks alone; physical theft or loss of devices can also lead to compromised data.

For example, laptops, smartphones, or storage devices containing sensitive information may be stolen or misplaced, potentially exposing the data to unauthorized individuals. Additionally, physical documents, such as client files or financial records, can be lost or mishandled, resulting in data breaches.

Third-Party Breaches:

Investment banks often collaborate with third-party vendors, such as cloud service providers, software developers, or data processors, to streamline operations. However, these partnerships can introduce additional risks.

For example, a breach in a third-party system can expose sensitive financial data. ECM teams should conduct due diligence when selecting and managing third-party vendors.

Ransomware Attacks:

In recent years, ransomware attacks have become a significant threat to investment banking. In a ransomware attack, hackers infiltrate an organization's network and encrypt valuable data, rendering it inaccessible. They then demand a ransom payment in exchange for restoring access to the data. If the victim refuses to pay, the attackers may threaten to leak sensitive information or disrupt critical systems. As a result, ransomware attacks can have severe financial and reputational consequences for investment banks.

These are just a few examples of data breaches that can occur within the investment banking industry. By understanding these risks, ECM teams, working with IT departments, can proactively strengthen their data security defenses and implement processes to protect sensitive information from unauthorized access or exposure.

Fines and Legal Consequences

In both the United States and Canada, financial institutions face significant consequences in the event of a data breach, including substantial fines and legal actions. Regulatory bodies have implemented stringent data protection regulations to ensure the security and privacy of sensitive information.

In the United States, organizations may be subject to fines and penalties under various laws, such as the Gramm-Leach-Bliley Act (GLBA) for financial institutions and state-specific data breach notification laws. The penalties can range from thousands to millions of dollars, depending on the severity of the breach and the number of individuals affected.

Similarly, in Canada, companies must comply with federal laws, such as the Personal Information Protection and Electronic Documents Act (PIPEDA) and provincial privacy legislation. Non-compliance with these regulations can lead to significant financial consequences, with fines ranging from thousands to millions of dollars.

Additionally, organizations may face legal actions from affected individuals, resulting in potential compensation payouts and reputational damage. A data breach's potential financial and legal impact underscores the critical need for investment banks and ECM teams to prioritize robust data security measures to avoid such penalties and protect their clients' information.

Actions ECM Teams Can Take

While ownership of data security usually sits with IT departments, there are steps and questions that ECM teams can raise within other departments in investment banks to understand better and help mitigate risks.

Regularly Assess Data Security Protocols:

Ensuring that data security protocols are reviewed through internal audits in collaboration with IT teams at regular intervals can help to identify any vulnerabilities or gaps. This could include both system access and also hardware security. For example, is data stored on physical drives that could be accidentally lost or intentionally removed?

Implement Strong Authentication and Access Controls:

ECM teams should work closely with IT departments to establish robust authentication and access control mechanisms. This includes multifactor authentication, strong password policies, and role-based access controls to restrict unauthorized access.

Conduct Employee Training and Awareness Programs:

Leaders in ECM teams can emphasize the importance of data security to all employees through regular training sessions to educate them about potential threats and best practices for data protection.

Developing processes for employees to report suspicious activities promptly will also help firms be more vigilant.

Foster a Culture of Data Security:

ECM teams can play a significant part in fostering a culture where data security is ingrained in the organization's DNA. Firms can achieve this by encouraging open communication, sharing best practices, and prioritizing data security at all levels of the organization.

By prioritizing data protection, ECM teams can safeguard client relationships, avoid potential fines and punishments, and maintain a strong reputation in the industry. Collaborating with IT departments and vendors, frequently reviewing data security protocols, and embracing data security best practices are essential to mitigate risks and enhance overall security.

Remember, building trust takes time in the digital age, but it can be destroyed within minutes due to a single data breach.

How Katipult DealFlow Can Help

At Katipult, we understand how critical security and data protection is for our customers, which is why it is a key priority for our engineering and product teams. We are constantly evolving our access controls, regulatory adherence, backups, encryption, identity management, logging, auditing, penetration testing and security processes to keep all data safe.  

IT departments have a wide range of responsibilities to several teams within an investment firm. Katipult DealFlow can make investment workflows significantly faster for you and your investors, improve your IT department's efficiency, and increase your data security all at once.