The FCA and Call Recording: A Short Guide
CommsTrader takes a look at call recording regulations as they apply to the financial services industry.
For most pieces of regulation covering the recording of business telephone calls, the focus is very much on setting restrictions on what can be recorded and how the recordings are used. Data protection laws, PCI-DSS, HIPAA and so on, all aim to limit the scope of call recording to protect privacy and guard against identity theft.
But in the financial service industry, things are a little different. Indeed, rules set out by the Financial Conduct Authority (FCA) in its Conduct of Business Sourcebook (COBS, otherwise known as ‘The Handbook’) actually demand member organisations do more call recording, rather than less.
In this short guide, we will have a look at exactly what the FCA regulations say, who they apply to, the rationale behind them and what they mean for affected parties in practice.
What is the FCA?
The Financial Conduct Authority is an independent regulatory body for the UK financial services industry. Funded through subscriptions from 56,000 members organisations, the FCA is licensed by UK government to oversee compliance with all legal instruments relating to the marketing and sale of financial products. Its overarching aim is to deter, detect and prevent abuse and malpractice in the financial markets. The rules on acceptable conduct and practice are all summarised in the COBS handbook.
What does the FCA have to say on call recording?
The rules on call recording are contained in COBS 11.8. The FCA summarises the regulations thus:
“The rules in COBS 11.8 oblige firms to retain records of specific telephone conversations and electronic communications of client order services that relate to the reception, transmission and execution of client orders and proprietary trading. It includes communications that are intended to result in a transaction, even if ultimately they do not.”
What this means is that any telephone conversations relating to the sale, marketing and promotion of so-called financial instruments must be recorded by the vendors. Financial instruments are any of a number of commercial financial products, including equities, loans, bonds, stocks, derivatives and currency.
The last line of this paragraph is significant, stating that calls must be recorded even if they do not lead to a sale. This broadens the scope of the requirement to record, for example to include instances when a customer calls up asking for information about an available product.
Who do the rules apply to?
Banks, stockbrokers, investment managers and commodities dealers are all required to follow these regulations. This translates to about 30,000 organisations at present, mostly City traders.
It is important to note that the regulations do not just apply to calls between a firm and their clients. As financial organisations often act on behalf of their clients when dealing in stocks and derivatives, the rules also apply to any calls made between firms when the intention is trade on behalf of a client.
What is the thinking behind these rules?
The regulations on call recording were introduced in 2009, not long after the financial industry was widely accused of bringing the global economy to its knees by playing fast and loose with the markets. The fact is, the financial instruments market is hugely complex, and over the past decade or two, the industry has been rocked by scandal after scandal involving firms manipulating the markets or doing deals with each other to stack the benefits in their favour.
The thinking behind enforcing universal call recording is that it leaves no place to hide if traders do want to try to fiddle the system. If every conversation and transaction is recorded, there is always clear evidence of malpractice.
How are the rules enforced?
Financial bodies have to be members of the FCA to be licensed to trade in financial instruments. Part of the condition of membership is that firms have to be regularly audited to check they are complying with the rules. If they are not compliant, their license will be stripped from them, and they will not be allowed to trade.
What do the rules mean for affected firms?
The requirement to record every call creates a significant administrative burden on firms:
- They have to invest in call recording software or services
- They have to ensure staff are appropriately trained and monitor compliance
- They have to create and manage an appropriate audit trail for all relevant communications
- They have to securely store all recorded communications for a minimum of six months
This last point can be particularly troublesome for firms, as the storing of any recorded client data – names, addresses, financial details and so on – brings them under the regulatory remit of the Data Protection Act. So even as they are making sure they are compliant with FCA rules, they have to also ensure they don’t breach privacy legislation by allowing client data to be accessed in unauthorised ways.
What does the future look like?
In January 2018, a new EU-wide directive known as MiFID II will come into force. As the UK will still at that point be an EU member, the terms of MiFID II will alter the current regulations on call recording set out in COBS 11.8.
At present, the FCA rules on call recording do not cover internal conversations, calls made by back office staff at firms which are unrelated to the sale or marketing of financial instruments, or any communications from investment analysts or retail financial services providers – i.e., firms selling financial advice rather than financial products.
All of these are likely to be brought under the remit of MiFID II. This will greatly increase the scope of call recording across the industry, requiring previously exempt organisations to start recording, and essentially demanding firms which already do to record every type of communication.
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