Compliance Update: FCA’s Rules on Recording – Whose Affected?

Robert Powell reviews the compliance impact from the UK’s latest FCA Ruling

Compliance Update FCA’s Rules on Recording

by Robert Powell, Director of Compliance, IPC

On July 2, the long-anticipated policy statement from the United Kingdom’s Financial Conduct Authority (FCA) was published. At 1,068 pages it is one of the longest we’ve seen in recent years. It covers five topics and has the potential to affect 18 different classes of firms.

Taping, the FCA’s generic terminology for communications records retention, received just 20 pages, but is full of interesting statements, and provides concrete decisions about some of the open questions from its recent consultation paper, “Markets in Financial Instruments Directive II Implementation – Policy Statement II” (PS 17/14).

Two areas of immediate market interest are the change in direction for taping of all corporate finance business and the change in scope for non-MiFID firms so they will no longer have to keep communication records relating to financial instruments that are not linked to a trading venue.

Corporate finance businesses will not be required to keep communications records for some aspects of their business. The arguments against expanding record keeping requirements to cover all corporate finance business do not appear to be very robust. The fact that transactions take place over long periods or that conversations might be taken out of context, or even lead to questions about legal liability, or legal privilege, do not show these businesses in a good light. This could cause some commentators to assume that the closing of ranks around this topic was a deliberate attempt to avoid scrutiny. That said, the FCA has given a very clear steer to corporate finance market participants. Firms must record any business in MiFID II instruments where the corporate finance business engages in the reception, transmission or execution of client orders, or when dealing on their own account.

The FCA’s final paragraph on this subject makes it clear what direction they are now taking in the expectation that corporate finance firms should record calls and communications. They say:

“Where such recordings can be captured in a manageable and proportionate way, we would regard it as good practice for firms to tape as a means of maintaining effective records.”

It will be hard for some firms to justify not recording their corporate finance businesses; especially if they engage in any MiFID II business. Keeping records for only part of your communications has always been a route to failure. It is difficult to be sure you have recorded what you should and not recorded what you don’t need to. Most firms tend to go down the road of recording everything rather than being non-compliant.

What about discretionary Investment advisors?

The consultation paper, mentioned above, asked for feedback on several proposed changes that fell outside of the strict requirements for MiFID II, but which had given the regulator difficulty in recovering records relating to specific past events. The main thrust of this was aimed at removing the qualified exemption allowing discretionary investment advisors to not keep communications records if they knew the calls were being recorded by the other participant. The FCA has decided to remove this qualified exemption. As a result, these firms will now be responsible for their own records retention for any communications leading to a transaction for their own account or intending to lead to a transaction.

In practice, this will mean that a few firms will need to start taping fixed and mobile phones along with retaining their electronic communications. Surveillance of these communications will also be required, but the FCA has stressed that it should be proportionate. Only time will tell what best practices develop for this group of market participants. I suggest looking to the United States, where this has been a requirement for some time, as this might give some clues for how this will evolve. Smaller firms often outsource this kind of monitoring to specialist firms. I expect to see similar boutique capabilities becoming available in the United Kingdom & Europe.

Energy Market Participants(EMPs), Oil Market Participants(OMPs) and other non-MiFID commodity and exotic derivative businesses will be covered by the new rules. Given that most of this market already records calls and retains communications data, the only real impact here will be an increased retention period from six months to five years and the addition of surveillance – which they may have been doing to some extent already.

Non-UK firms with branches in London are now included in these rules. While European and North American firms already adhere to similar requirements from their home regulator; firms from Asia-Pacific and Latin America may need to look at their record keeping practices ahead of January 2018.

The FCA’s goal of a harmonized set of rules for records retention across the industry will now become a reality on January 3, 2018. Financial markets will then – with few exceptions – need to:

  • Retain electronic and telephone communications for a period of five years from the time the communication took place.
  • Have a clear record of who, in their organization, was participating in each communication.
  • Conduct proportionate surveillance of those communications, to make sure your company and your employees are conducting business according to the rules.
  • Ensure you have immutable, multiple copies of each record to protect against any kind of data loss.

Our expectation is that we will see the technology providers delivering new solutions to meet the needs of the industry, including unified archives of voice and electronic communications that will easily combine with effective analytic tools to allow firms to meet these compliance needs going forward.