The FSA published a statement on recording communication which requires financial institutions to record certain conversations and electronic communications. The Policy Statement PS08/01 (‘Telephone Recording: recording of voice conversations and electronic communications’) was formulated following the feedback received in regards to the FSA’s Consultation Paper CP07/09 (‘Conduct of business regime: Non-MiFID deferred business’).
The new FSA rules on recording
From March 2009, UK financial institutions will have to record all telephone conversations and electronic communications involving client orders for the equity, bond and derivatives markets and retain the files for a minimum of six months unless they fall under one of the available exemptions or are excluded. The original proposal had been to retain the files for a minimum of three years although following a cost-benefit analysis this was reduced to six months. Furthermore, although no exhaustive list has been provided by the FSA it is understood that the term ‘electronic communications’ has been given a wide application and is set to include e-mails, any form of instant messaging, SMS and faxes. The cost of implementing the programme is unknown although the original cost estimations were in the region of £3 million with an annual ongoing cost of £3.5 - £4.5 million; however, this has already risen to £14 million with a much higher range of £6 - £11 million for ongoing costs.
The main exemptions
The main exemption to be used by most UK financial institutions is over mobile phone or handheld devices being used to conduct any client orders (except where emails have been used). The reason the FSA has introduced this exemption is because the technology necessary to record communications over mobile phones or handheld devices (except for emails) has so far been largely untested and the technology which is available is extremely expensive. The FSA will review this exemption in 18 months’ time.
Other exclusions include:
- any corporate finance business which is explicitly excluded under the FSA’s Conduct of Business rules;
- the recording of telephone conversations and electronic communications of discretionary investment managers where they are with ‘sell side’ firms who are subject to the FSA’s taping rules (e.g. FSA regulated brokers); and
- the recording of conversations concerning research analysts, retail financial advisers and any other person carrying out a back-office function.
The underlying purpose of the new rules
The new rules requiring financial institutions to record certain conversations and electronic communications are thought to help deter and detect market abuse and insider dealing in the UK. This is because the ‘knowledge’ and ‘intent’ elements of the offences are difficult to prove in cases without hard evidence and so with the new mandatory recordings it is thought prosecuting offenders will become easier and therefore act as a good deterrent for others who were thinking of committing an insider dealing or market abuse offence.
The new rules appear to be yet another compliance headache for firms who are already struggling to get to grips with MiFID, with the most likely victims being small-sized firms currently lacking any form of recording equipment who will be stung financially with high set-up costs. Nevertheless, although the impact of the recording rules will not be known for sometime they should be welcomed given that the new rules are set to act as a double-edged sword: one side making it more difficult for individuals to commit the offences and the other side making it easier to prove the essential elements required for prosecution. It is also important to advise clients that if they are recording communications then they should also make individuals aware that they are being recorded.