01 April 2008 Comments

 

FSA calls for recording of all comms

Tim Furmidge, BT Global Financial Services

The recent announcement from the FSA that from March 2009 companies will have to record all telephone and electronic communications relating to client orders and the conclusion of transactions is an attempt to tighten up some of the grey areas left by MiFID around the recording of communications relating to trading activities.

MiFID is not explicit on a European-wide approach to recording and the FSA has taken the view that it should act to fill the gap. The requirement only applies to firms conducting business from the UK in equities, bonds, financial commodities and derivatives markets.

The new regulation requires that anyone involved in receiving, executing or arranging to execute client orders and anyone negotiating, agreeing or making transactions must be recorded whether using voice or electronic communication formats (email, instant messaging and so on) and recordings must be stored for a minimum of six months (down from the originally muted period of three years). The regulations do not apply to corporate finance, corporate treasury or collective investment schemes.

It is worth noting that the FSA has not produced a definitive list of electronic communication mediums that apply to the recording regulations. Because the communications industry and the variety of communications methods is moving so fast, the FSA could find the list very quickly becomes out of date. Currently mobile phones are outside the scope of the regulation, although management is advised to have appropriate internal policies in place regarding taking client orders and transacting over mobile phones. The issue of recording mobile phone conversations will be reviewed in 18 months’ time.

The FSA believes that 80% of major banks already have voice recording systems in place, but that only 50% of smaller firms do. There will be costs associated with becoming compliant; although many firms may already archive e-mail, it is unlikely that companies have systems in place that archive more recently adopted communication formats such as IM and video.

It is likely that firms will bring forward longer term upgrade plans that will help to ensure compliance is achieved before the deadline, but still with a long term view to better overall systems performance.

The longer term goal for many larger organisations is to move to a centralised solution deployed in data centres, which then links directly to the trading floors. Compliance is likely to more of a challenge for smaller institutions which, unlike their larger counterparts, do not have specialist in-house teams to develop and manage the requisite systems and infrastructure.

As a result, smaller companies are likely to look for a service partner to help them achieve these goals, rather than attempt to manage it in-house.

In the longer term, firms will want to move to more seamless services supported by a common infrastructure deployed in the network and a consistent approach to recording all forms of communication from any device, anywhere. However in the short term, they will only be focussed on meeting minimum regulations.

There are also interesting implications for workflow on the trading floor. Will companies need to record internal conversations that may lead to a transaction? It is possible that we are looking at a situation where companies will feel they need to record virtually every electronic or voice conversation that takes place, in case a conversation is thought to have influenced a trading decision or client advice. It is likely that we will continue to see compliance getting stronger; we already know that the FSA will review mobile communications in 18 months time and it is possible that the review will not be restricted to just mobile communications.

The UK has taken a lead on filling some of the areas not covered by MiFID and time will tell if Europe moves to make the recording of trading-related conversations a Europe-wide initiative, or one just for the UK. There will be costs for companies in achieving compliance, but with effective planning, organisations can use this as an opportunity to improve their systems overall and there will be longer term benefits for UK financial institutions.

Tim Furmidge, head of product, BT Global Financial Services