Comms compliance race hots up
Communications compliance is moving up the agenda for financial services firms, as the City's watchdog cracks the supervisory whip and the implementation deadline for MiFID II fast approaches
Financial regulators are having their moment of glory. Regulators big and small are experiencing remarkable success in rooting out dishonest traders and dishing out multi-billion dollar fines to practically every behemoth on Wall Street.
The key to their success? Weeding out incriminating information from traders’ communications.
“If you ain’t cheating, you ain’t trying”. “Ohhh, f*cking Christmas.”
These kinds of off-hand remarks – which featured in a Barclays FX traders’ chatroom and in a HSBC FX scandal respectively – have been crucial to regulators’ success in investigating rigging benchmark rates for foreign exchange and Libor.
The focus for regulators now is to ensure that as many firms as possible retain records of all potentially relevant verbal and electronic communication, says Vaughan Edwards, an ex-regulator and senior compliance officer and now director at Medius Consulting.
“It can be incredibly powerful in determining the course of an investigation,” he says.
To that end, the UK’s Financial Conduct Authority (FCA) is proposing to sharpen its existing rules on recording communications. It was something of a pioneer in 2011 when it enforced mobile call recording for financial services institutions with a trading floor.
This targeted banks and brokers, but the FCA granted an exemption that included discretionary investment managers and corporate finance boutiques.
However, it is now proposing to scrap that and also wants to force smaller independent financial advisers to start taping calls. Industry experts say these proposals are highly likely to be approved, once the consultation period is over.
Alex Phillips is head of mobile for telecommunication services provider Adam Phones, which works chiefly with hedge funds, funds of funds and asset managers. He says they have taken a reactive view to the proposed changes.
“Politely put, a lot will be leaving it till late next year,” he says. “They’ve done a bit of research now to know there is something which can tick [the compliance box]. It’s just another thing put on the backburner.”
However, even those investment firms that are ahead of the game and do record calls will face additional burdens, says Susann Altkemper, counsel at law firm CMS.
Susann Altkemper, CMS
“[They will] need to do a lot more to establish policies and procedures around that process,” she says.
There is a move away from just recording calls to analysing the information to detect market abuse. The European Union’s second iteration of the Markets in Financial Instruments Directive (Mifid II) is coming into force soon; financial services institutions must be compliant by January 2018.
These new laws will make the recording of telephone conversations and electronic communications in the financial services sector mandatory across all EU member states.
Mifid II demands that firms periodically monitor their recordings, which must be of good quality in case they need to be scrutinized as part of an investigation. It also requires them to store the recordings for years; UK firms currently only have to store recordings for six months.
The wording is clear, says Mark Harrington, compliance consultant in financial technology services at BT.
Mark Harrington, BT
“Anyone involved in giving advice that leads or may lead to a trade or investment must not only record their calls or indeed any interactions but securely archive them for up to five years, ensuring that regulators have access to them as and when required,” he says. This creates a storage headache for large firms such as global banks, which have traditionally preferred to store recordings on premises for security reasons. The advance of cloud-based storage such as Amazon Drive now allows firms to store greater amounts of recordings at a reduced cost, but the risk of a cyberattack can never be eliminated.
Inter-dealer broker Tullett Prebon is the latest firm to step up its efforts by recording not only its voice calls but also its traders’ mobile chats on instant messaging (IM). It started using recording technology specialist VoxSmart in 2015 for mobile voice recording, and earlier this summer decided to record its IM chats too.
VoxSmart’s CEO Oliver Blower says: “Financial markets is not just voice anymore. [Tullet Prebon’s brokers] weren’t able to communicate with clients over these channels because they weren’t recorded. They can offer these channels to clients [who] can communicate with brokers in a compliant way.”
Some firms have chosen to ban certain encrypted messaging apps such as WhatsApp and even Apple’s iMessage, because of the difficulties recording them, says Chris Durrant, director in the forensic group at Deloitte.
Chris Durrant, Deloitte
“The main problem with iMessage and WhatsApp is [that] they are third-party apps,” he says. “They are not controlled by the company, and so those conversations with another person don’t go through the firm’s systems.”
A ban is easier to enforce where traders use a single, recorded device that doubles up as a work and personal mobile phone, but some traders still prefer to have two devices.
The recording and monitoring rules might seem like a headache for firms, but in time they could yield useful, profit-boosting information, predicts Bob Mudhar, partner at Citihub Consulting.
“You have a much better idea which clients come in, ask for quotes and convert that into something, versus clients that don’t end up converting quotes into real transactions that are profitable,” he says.
Banks could calculate which of its clients are the most profitable and focus on those, or figure out how to be more attractive to those that request quotes but fail to complete a transaction.