B.I.S.S Research White Papers

Are Compliance Officers Now Plugged into Mobile Phone Regs?

Gary Wright

Gary Wright

A leader in financial market innovation based on in depth knowledge of financial markets processes and specialising in data. Creator of business cases for new products and services in financial markets.

Compliance officers at City firms were certainly out in their droves this week at a call recording, fraud detection and analytics event hosted at by Business Systems a recognised UK leader in phone recording for compliant purposes.

A key highlight amongst various presentations and case studies offered up by the likes of BT Global Services and West Midlands Police was an industry panel on the potential impact of mobile phone recording on the UK financial services industry. An FSA representative was on hand to provide a summary of the recent consultation feedback (CP10/7, 18 March 2010), rationale for the decision and steps firms should now be taking.

Coming less than two weeks after the FSA published its new rules on mobile phone recording rules (‘COB 11.8 Taping Rules’), which will come into effect on 14 November 2011, it was abundantly clear from the proceedings that there is still an “education exercise” to be undertaken with the market – both for sell-side and buy-side institutions.

It was a view naturally echoed by panellists from Vodafone, NICE Systems, TM-Group and Business Systems from initial discussions with market participants. But then one well might expect the vendors to beat that drum (although B.I.S.S. Research’s own findings undertaken in August-September support this general view).

For example, Chris Daniels, VP Integrated Trading Solutions, NICE Systems, argued: “Firms are struggling to understand the total cost of ownership (TCO) of the solutions available.”

Even though the one-year transition period might seem way off, some delegates’ really questioned and put the FSA on the spot over the validity and logic of the rules. One compliance officer from a sell-side firm openly described a response from the FSA as a typical “politician’s answer”. One word summed it up: scepticism.

Jocelyn McCafferty, a manager in the FSA’s Policy Conduct unit, running through a presentation on the cost/benefits, legal/privacy issues of mobile recording in the EU and internationally, and the European timetable, stressed that: “The FSA was not trying to trip firms up”. Rather the new rules were designed to increase the “quality of information” for building cases around market abuse.

McCafferty reiterated the UK regulator’s view that their cost estimates – commissioned from Europe
Economics – for deploying mobile taping systems were “an average”. While acknowledging that they could potentially be higher or lower than the range of figures presented, she added that the regulator “felt there was insufficient evidence to alter our view” and were “robust” enough.

While the FSA does not endorse any one supplier of mobile phone recording systems, McCafferty indicated that in relation to “proportionality” that they had not received any evidence that small firms would be necessarily be impacted more than larger players. In effect, it was down to firms to make their technology choices appropriately.

Some delegates were clearly unsure about the extent of the upcoming rules and in particular over what constituted a “relevant conversation” (e.g. including voice calls, SMS, text communication) between parties and whether it meant the call had to on/ off the trading floor. Geographical location of the call was not the issue. And, evidencing general misunderstanding (or was it a pop at the FSA?) one delegate asked why oral conversations in meeting rooms were not also being recorded.

Such matters had to be clarified by McCafferty, as was the remit to cover devices such iPhones, iPad and some Nokia devices that do not allow calls to be recorded. The key point was that if the conversation was “relevant”, it needed to be recorded. Some City firms invested heavily earlier this year in such mobile devices that may have to replaced or scrapped. (Note: One vendor claimed that they had advised one large sellside not to proceed with that investment, but the advice had been ignored).

Turning to the comparability of the UK’s retention period for recordings (6 months) with the rest of Europe, McCafferty said: “They [CESR] are likely to propose something different to the 5-year retention period…but it’s unlikely to be the same as the UK.” (At the moment given the ongoing MiFID review, the 5-year retention period is only advice from CESR to the Commission).

There are also issues to consider with regard to differing privacy laws and ‘extra-territoriality’ across Europe. At the EU level, CESR and the European Commission have both confirmed there is a legal provision for recording telephone traffic under certain conditions. McCafferty said: “We’re satisfied that the legal framework exists although they may raise privacy issues. And, we would expect firms to arrange for communications to be routed to [a] private, firm network.”

At the international level, reasonable steps will guide firms and the FSA says they “would not expect firms to negotiate jurisdiction-by-jurisdiction if it was not reasonable to do so.”

On the broad cost-benefit analysis, Matt Chalk, Finance Manager at Vodafone, said that mobile phone recording system deployments could prove “cost neutral”. Although this would be dependent on the ratio of incoming/outgoing calls made. Chris Daniels at NICE referred to a “misconception” in costs said: “We don’t see storage as the big cost in the equation.”

Carsten Kruse Nielsen, COO of TM-Group, pointed to the real benefit from deploying the technology as fundamentally “meeting firms’ obligations under the law”. TM-Group has been involved in a number of client deployments in Norway, where the regulator there has set January 2012 for the compliance deadline Denmark, Sweden and Finland are likely follow the Norwegian regulator’s lead in due course.

The FSA urges firms to enter a dialogue with the regulator and work with industry bodies if they encounter problems in meeting next year’s deadline. Now that the rules are out, we would expect the industry to be more relaxed in commenting further on their preparedness. Before the Policy Statement it was a case of “No comment”, but surely now there can be no excuse for silence.

A clearer picture on matters in the UK should emerge during Q1 2011, although firms would be well advised to start planning and taking steps to avoid any unforeseen IT deployment bottlenecks. The FSA expects firms to work with technology providers in sourcing appropriate solutions.

B.I.S.S. Research is an independent research company facilitating Academic Research for Financial Services.

Tweets by BISSResearch

Gary Wright

Gary Wright

A leader in financial market innovation based on in depth knowledge of financial markets processes and specialising in data. Creator of business cases for new products and services in financial markets.