Introduction

Earlier this month, the FSA published new rules requiring firms to record telephone conversations and other electronic communications, so as to help prevent, detect and deter market abuse.  The FSA hopes that, by introducing a uniform approach to the recording of communications and the maintenance of records, the standard of behaviour of those using telephone lines and means of electronic communication will be raised.  It is also anticipated that such recording will increase the quality and volume of information available for pursuing market abuse cases, one of the most difficult offences for the FSA to investigate and prosecute.

Initial proposals for a recording regime were set out in the FSA’s Consultation Paper 07/09, which was followed, in Policy Statement 07/18, by the FSA’s decision to postpone publication of the rules, so as to allow for further examination of industry concerns in light of the responses received to that consultation.

The FSA has now published Policy Statement 08/1, which makes significant changes to the proposals set out in CP07/09, the FSA having re-examined the cost benefit analysis of the telephone recording regime and further consulted with trade associations to consider the scope and practicalities of the proposals. 

PS08/1 and its implications for firms

Application and scope

PS08/1 is of relevance to firms across the equity, bond and financial commodity and derivatives market, which negotiate, agree and arrange transactions. 

Firms’ obligations under the telephone recording rules

From next March, firms will have to record all telephone conversations and electronic communications which relate to client orders and the conclusion of transactions in the equity, bond and derivatives market.  In order to assess the full extent of their firms’ duties, compliance officers should read PS08/1 in conjunction with the earlier Policy Statement 07/18.

The main changes to the FSA’s original proposals are set out in PS08/1 and can be summarised as follows:

·           the retention period for recorded calls and communications has been reduced from three years to six months;

·           mobile phone conversations have been exempted from the taping rules, but this will be reviewed again in eighteen months time; and

·           discretionary investment managers will not be required to record telephone conversations and electronic communications with firms that are subject to the taping rules.

Practical tips for firms

Compliance officers of all firms caught by the new rules should read the fine detail of PS08/1 and ensure that staff at all levels are up to speed on the changes.  Whilst the new rules will not come into force until March 2009, firms should not underestimate the time and resources to be invested in order to have the necessary technological and organisational frameworks in place so as to ensure compliance.

Regarding the operational side of implementation, it is hoped that the trade associations will work with the FSA to develop guidance for their members on the application of the rules through “workable consistent solutions” for the proper development and execution of operational and technological systems for telephone recording. 

The European dimension and its implications for UK firms

It should not be assumed that the new UK rules are the end of the story for firms’ telephone recording obligations.  Article 51 of the Markets in Financial Instruments Directive (MiFID) requires that before 31 December 2009, the European Commission will report on whether the discretion EU Member States are afforded with regards introducing taping requirements at domestic level remains appropriate.  This report will be based upon the advice of the Committee of European Securities Regulators (CESR).  This review could mean a further move of the taping requirement goalposts in the UK and the FSA has come under much criticism from the industry for pre-empting and perhaps second-guessing new rules which may come out of the European Union.

In its defence, the FSA maintains that the outcome of the EU's review is by no means certain and further changes may not be forthcoming: Member States successfully opposed taping requirements during the MiFID level 2 negotiations and the same may well happen again.  The scope of the EU review will be narrower than that of the FSA rules: the former covering only the taking of client orders, whereas the latter encompass client orders and dealing.  The FSA has scaled back its original proposals following resistance from the industry, which could be seen as a partial recognition of the concerns of trade associations in this regard. 

Conclusions and comment

Given the European dimension and the FSA’s statement that it intends to keep all aspects of these rules under ongoing review, the telephone recording regime is evolving into a somewhat moveable feast.

The FSA’s objective in deterring, detecting and preventing market abuse is fine, but those in the industry will soon be acutely aware of the potential extensive investment, both in terms of time and resources, which will be required to implement the new rules.  Commentators have been keen to point out that, in spite of the costs involved, there will be no direct benefit either for the firms themselves or their customers.  Rubbing salt into the wound, these costs are likely to be over and above those incurred by their European competitors and this, coupled with the knowledge that the regulatory goalposts could well move in the near future, is likely to leave a bitter taste in the mouths of those currently digesting the new recording rules.

Hannah Clark and

Martin Day

Financial Services Team

Farrer & Co