The European Commission has released a supplementary document to provide firms with further details on a range of MiFID II provisions. Included in the document is information pertaining to organisational requirements and operational conditions that will become applicable under the new Directive. This document will be of particular interest to those firms seeking a greater understanding of changes to call recording and record keeping requirements stipulated by MiFID II.
BackgroundAs well as broadening the scope of its predecessor, MiFID II contains new and far-reaching provisions to strengthen investor protection and minimise financial market abuse throughout the EU. Consequently, firms operating within the bloc can expect to see a sharp increase in compliance obligations when the Directive comes into force in January 2018. The communications recording and record keeping aspects of MiFID II form part of a wider G20 commitment to stabilise financial markets in the wake of the 2008 financial crisis. This commitment will be underpinned by an industry-wide regime of comprehensive communications recording and record keeping regulations; delivering end-to-end trade visibility and greater scrutiny of trader behaviour; to strengthen checks-and-balances and drive a culture of transparency throughout the financial sector. These regulations will be administered and monitored by regional authorities (the FCA in the UK) equipped with powers to impose significant sanctions on firms that do not comply.
What Are the Communications Recording and Record Keeping Requirements Under MiFID II?MiFID II contains a broad range of provisions that relate to the recording of electronic communications and the documentation of face-to-face meetings. The measures cover everything from what type of communications must be recorded to when recording must take place. In addition, the Directive also lays out stringent rules that dictate how those recordings must be stored and for how long they must be retained. Unfortunately, due to the sheer density of the Directive, unpicking the finer details can be an arduous task and for many firms this has resulted in confusion and uncertainty about what exactly will be expected of them – particularly regarding communications recording and record keeping practices. Thankfully the supplementary document released by the EC provides firms with the additional details that they need in a single, manageable document. Entitled ‘COMMISSION DELEGATED REGULATION (EU) …/... of 25.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive’, the full document can be found on the ec.europa.eu website here. However, for the purposes of examining requirements relevant to communications recording and record keeping, section eight of the document is reproduced below. This section includes specific information relating to the recording of electronic communications, the requirements for documenting face-to-face meetings and details regarding record keeping.
- Retention of Records
- Record keeping of rights and obligations of the investment firm and the client
- Record keeping of client orders and decision to deal
- Record keeping of transactions and order processing
- Recording of telephone conversations or electronic communications
- Face-to-Face meetings
- Storage Requirements
Section 8 – Record KeepingArticle 72
- The records shall be retained in a medium that allows the storage of information in a way accessible for future reference by the competent authority, and in such a form and manner that the following conditions are met:
- the competent authority is able to access them readily and to reconstitute each key stage of the processing of each transaction;
- it is possible for any corrections or other amendments, and the contents of the records prior to such corrections or amendments, to be easily ascertained;
- it is not possible for the records otherwise to be manipulated or altered;
- it allows IT or any other efficient exploitation when the analysis of the data cannot be easily carried out due to the volume and the nature of the data; and the firm’s arrangements comply with the record keeping requirements irrespective of the technology used.
- Investment firms shall keep at least the records identified in Annex I to this Regulation depending upon the nature of their activities. The list of records identified in Annex I to this Regulation is without prejudice to any other record-keeping obligations arising from other legislation.
- Investment firms shall also keep records of any policies and procedures they are required to maintain pursuant to Directive 2014/65/EU, Regulation (EU) No 600/2014, Directive 2014/57/EU and Regulation (EU) No 596/2014 and their respective implementing measures in writing. Competent authorities may require investment firms to keep additional records to the list identified in Annex I to this Regulation.
- Investment firms shall establish, implement and maintain an effective recording of telephone conversations and electronic communications policy, set out in writing, and appropriate to the size and organisation of the firm, and the nature, scale and complexity of its business. The policy shall include the following content:
- the identification of the telephone conversations and electronic communications, including relevant internal telephone conversations and electronic communications, that are subject to the recording requirements in accordance with Article 16(7) of Directive 2014/65/EU; and
- the specification of the procedures to be followed and measures to be adopted to ensure the firm’s compliance with the third and eighth subparagraphs of Article 16(7) of Directive 2014/65/EU where exceptional circumstances arise and the firm is unable to record the conversation/communication on devices issued, accepted or permitted by the firm. Evidence of such circumstances shall be retained and shall be accessible to competent authorities.
- Investment firms shall ensure that the management body has effective oversight and control over the policies and procedures relating to the firm’s recording of telephone conversations and electronic communications.
- Investment firms shall ensure that the arrangements to comply with recording requirements are technology-neutral. Firms shall periodically evaluate the effectiveness of the firm’s policies and procedures and adopt any such alternative or additional measures and procedures as are necessary and appropriate. At a minimum, such adoption of alternative or additional measures shall occur when a new medium of communication is accepted or permitted for use by the firm.
- Investment firms shall keep and regularly update a record of those individuals who have firm devices or privately owned devices that have been approved for use by the firm. EN 89 EN
- Investment firms shall educate and train employees in procedures governing the requirements in Article 16(7) of Directive 2014/65/EU.
- To monitor compliance with the recording and record-keeping requirements in accordance with Article 16(7) of Directive 2014/65/EU, investment firms shall periodically monitor the records of transactions and orders subject to these requirements, including relevant conversations. Such monitoring shall be risk based and proportionate.
- Investment firms shall demonstrate the policies, procedures and management oversight of the recording rules to the relevant competent authorities upon request.
- Before investment firms provide investment services and activities relating to the reception, transmission and execution of orders to new and existing clients, firms shall inform the client of the following:
- that the conversations and communications are being recorded; and
- that a copy of the recording of such conversations with the client and communications with the client will be available on request for a period of five years and, where requested by the competent authority, for a period of up to seven years. The information referred to in the first sub-paragraph shall be presented in the same language(s) as that used to provide investment services to clients.
- Investment firms shall record in a durable medium all relevant information related to relevant face-to-face conversations with clients. The information recorded shall include at least the following:
- date and time of meetings;
- location of meetings;
- identity of the attendees;
- initiator of the meetings; and
- relevant information about the client order including the price, volume, type of order and when it shall be transmitted or executed.
- Records shall be stored in a durable medium, which allows them to be replayed or copied and must be retained in a format that does not allow the original record to be altered or deleted. Records shall be stored in a medium so that they are readily accessible and available to clients on request. Firms shall ensure the quality, accuracy and completeness of the records of all telephone recordings and electronic communications.
- The period of time for the retention of a record shall begin on the date when the record is created.