Februaury 16 2016
The Financial Services industry in Europe is facing the biggest shake-up of regulatory legislation for over a decade. Driven in part by widespread consumer mistrust, the recasting of the Markets in Financial Instruments Directive, known as MiFID II and the accompanying Regulation, MiFIR, will put into place far-reaching new rules, which aim to strengthen investor protection, prevent market abuse, increase transparency and re-establish consumer trust.
“The biggest shake-up of regulations for a decade”
In order to achieve these objectives, MiFID II provides a legislative framework set out by the European Commission to leverage disclosure and reporting as regulatory tools and introduces robust compliance obligations for firms operating within the EU.
Some of the most contentious aspects of the new regulations concern the use of communications recording - both in terms of the scope of communications that must be recorded and the requirement for firms to monitor recordings in order to remain compliant.
What needs to be recorded?
Article 16(7) of the Directive states that:
“Records shall include the recording of telephone conversations or electronic communications relating to, at least, transactions concluded when dealing on own account and the provision of client order services that relate to the reception, transmission and execution of client orders.”
Article 16(7) also makes it clear that:
“Such telephone conversations and electronic communications shall also include those that are intended to result in transactions concluded when dealing on own account or in the provision of client order services that relate to the reception, transmission and execution of client orders, even if those conversations or communications do not result in the conclusion of such transactions or in the provision of client order services.”
In addition, Recital 57 of the Directive states that:
“Such records should ensure that there is evidence to…detect any behaviour that may have relevance in terms of market abuse, including when firms deal on own account.”
“Those records should be available to competent authorities in the fulfilment of their supervisory tasks and in the performance of enforcement actions under this Directive and under (the) Regulation”
“…firms will be obliged to record all communications that are intended to result in a transaction”
So this makes it clear - firms will be obliged to record all telephone conversations and electronic communications that result in a transaction, including communications that are intended to result in a transaction, irrespective of outcome. These rules will apply equally to firms dealing on their own account as well as those providing services for external clients. Firms will be required to retain all recordings for a minimum five-year period, during which time they should be readily available to clients and enforcement authorities upon request. In addition, firms will be expected to demonstrate to supervisory bodies that they have adequate policies and procedures in place to ensure a minimised risk of disorderly trading and market abuse - these procedures will inevitably include the monitoring of recorded communications.
What should firms do now?
With less than two years to go until the January 2018 implementation of MiFID II, firms should make an immediate assessment of all aspects of their business communications. To gain a full understanding of their current position is a vital first step in recognising which communications will be subject to the new recording rules and will also help firms to identify areas where investment may be required. Where firms already have call recording strategies in place, this review process will flag up any technical shortfalls that need addressing in order to make existing recording infrastructure ready for MiFID II.
The term “electronic communications” used in the legislation is deliberately vague and acknowledges the rapid pace of change in communications technology. In order to remain compliant, a firm’s recording infrastructure will need to be adaptable to accommodate future developments. At the time of writing, “electronic communications” should be considered to include fixed and mobile telephony, emails, SMS and IM and firms should ensure that their recording infrastructure is capable of capturing at least these channels.
In addition to recording calls and electronic communications, MiFID II also introduces stringent guidelines for the documentation of face-to-face meetings. Whilst MiFID II does not necessitate the recording of face-to-face meetings at this time, firms would be wise to consider the savings and benefits of a unified communications recording platform that supports meeting capture as part of a wider, forward thinking compliance strategy.
with the new regulatory requirements and ensure compliance is maintained, all firms should be asking themselves if their recording solution is robust enough to absorb increased recording demands and flexible enough to accommodate future developments in communications technology.