April 7th 2017
Following a period of consultation with the industry, the FCA has announced that it will be softening its application of MiFID II electronic communications recording (aka ‘taping’) requirements for Article 3 firms. The announcement follows a call from the Association of Professional Financial Advisors urging the FCA not to disproportionately “gold-plate” MiFID II regulations for the advisor market.
MiFID II requires firms to record all “electronic communications” (including landline/mobile phone calls, SMS, and chat) that relate to the reception, transmission and execution of orders, irrespective of whether those communications actually result in a trade or not and to retain those recordings for a minimum period of five years.
In its consultation paper CP29/16, the FCA published proposals to roll out these taping rules to all Article 3 firms – a category largely comprised of financial advice firms and corporate finance boutiques - which are currently exempt from taping requirements under the original MiFID regulations.
Through CP16/29, the FCA invited the industry to respond so that it might gage the suitability and appropriateness of the proposals. The Association of Professional Financial Advisors (APFA) responded with a request for a more minimalist approach to the regulations, particularly with respect to smaller advice firms that would, in APFA’s opinion, be subjected to a disproportionate financial burden if the full regulatory requirements outlined in the proposals were to be applied. Speaking in response to the FCA proposals, APFA director general Chris Hannant said:
“The (MiFID II) taping measures are intended to combat market abuse and make sense in the context of trading conditions, where timing is crucial to the outcome and you need to know who said what and when. The proposals are disproportionate in an advisory context.”
On Friday March 31st, the FCA published its first policy statement setting out the near final rules for the implementation of MiFID II. In it they covered areas that were consulted on in several of its preceding consultation papers, including CP29/16. With regard to the proposals to extend MiFID taping rules to Article 3 firms, they wrote:
“In CP16/29, we indicated that we would consider the proportionality of the proposals to tape firms who can be characterised as Article 3 RFAs, and were open to receiving and exploring suggestions on alternative proposals for firms, particularly for smaller financial advisers.”
The statement continues:
“Based on the responses received and following extensive industry engagement, we have concluded that additional flexibility for all Article 3 RFAs is appropriate. This is because the business model of many of these firms is such that a full taping obligation may not always be proportionate. As such, we will propose that these firms, irrespective of size, can comply with the ‘at least analogous’ requirement by either taping all relevant conversations or taking a written note of all relevant conversations.”
So, the policy statement makes it clear that Article 3 firms will be permitted to record relevant communications either through taping or by taking "at least analogous" written notes. The exact details of what such written notes must contain are yet to be finalised but the FCA statement goes on to make it clear that written notes must have an "at least analogous" outcome in terms of advancing consumer protection as taping would provide.
The statement says:
“…in order for the note to meet the ‘analogous’ requirement under MiFID II, it must have an analogous outcome in terms of advancing our consumer protection objective. Firms will not be able to rely solely on their current record keeping requirements to meet this objective.”
“We are likely to undertake a formal review of how these proposals have been adhered to in a post-implementation review project.”
It is the opinion of Weston Digital Technologies that this suggests that in order to remain ‘analogous’ with a taping regime, it is highly likely that written notes will be subjected to the same stringent management and retention rules as taped communications, and that a demonstrable overhaul of policies and procedures will be expected of firms that opt to use written notes. This would certainly be in keeping with other areas of MiFID II legislation - for example the documenting of face-to-face meetings - where written notes may be used so long as such notes are retained in an easily accessible, durable medium for the same five-year period as recorded electronic communications.
The FCA have stated that they will publish the final rules, including full details of what information written notes must contain and how they must be retained, in June.
Whilst Weston Digital Technologies welcomes legislation that works with the industry and that which is not overly prescriptive, it remains our view that taping is the best long-term solution for firms seeking to meet MiFID II taping and record-keeping compliance obligations.
Over the course of the CP16/29 consultation period - and indeed throughout the wider discussion around changing taping requirements under MiFID II - we have observed a growing number of voices within the industry raising concerns about the cost and practical implications of installing communications recording solutions, particularly for smaller firms. Weston Digital Technologies maintains the view that investing in communications recording and management solutions need not be the onerous and costly exercise that has been suggested by some industry commentators and that the benefits of communications recording are many-fold and undisputable:
- Provides centralised (non-siloed) data storage for communications across the business
- Supports centrally managed retention policies
- Makes all communications easily searchable
- Makes all communications readily available to compliance teams and auditors
- Provides quick, cost effective dispute resolution and trade reconstruction
- Provides access to emerging analysis technologies
- Avoids ‘swivel-chair compliance’ (the use of multiple, disparate solutions to meet compliance obligations)
- Supports a more cost-effective, holistic approach to compliance, risk mitigation and data analysis
During the CP16/29 consultation period, FCA policy, strategy and competition director David Geale stated that the FCA’s position was that the requirement to implement communications recording should not result in a disproportionate burden on Article 3 firms.
“We (the FCA) believe that the taping of telephone calls need not be onerous or expensive. Technology exists to enable advisers to record and store calls easily and affordably, we therefore believe it is proportionate to require firms to tape calls.”
Weston Digital Technologies wholeheartedly agrees with this statement and we remain committed to providing tailored communications recording and analysis solutions that fit our customers’ needs at a cost that suits their budget. Weston has over two decades of experience that enables us to design solutions for large organisations or SME customers across the industry and our competitive pricing and flexible licensing ensures that firms get the very best deals.
So, if you are an IFA that is affected by changes to recording exemption rules under MiFID II and you want to know more about the options that are available to you, get in touch today so that we can discuss a cost-effective solution that is tailor-made for your business. We will be happy to demonstrate the full value to your business of implementing a communications recording and analysis solution and we are confident that you will be pleasantly surprised by what we have to tell you regarding cost!