Telephone recording obligations set out in MiFID II are not without issue and these seemingly incremental changes still require attention.
The Financial Conduct Authority sets out its latest position in PS17/5, building on draft proposals set out in CP16/29. As a number of points are still being settled, the FCA expects to publish its final rules in June 2017.
While MiFID II extends the scope of requirements found in MiFID I, the FCA considers this is no more prescriptive or differently focused from its existing regime and should not be a material change for those already in scope. Firms won’t necessarily be comforted, as the FCA does still propose several step changes that firms will need to think about before MiFID II comes into effect on 3 January 2018.
- Several additional activities and firms are newly in scope:
- MiFID II firms carrying on corporate finance business;
- Optionally exempt (Article 3) MiFID II firms (typically this includes retail financial advisory firms); and
- Discretionary investment managers (in that they can no longer rely on a third party’s recording of communications).
The FCA intends to continue its policy of applying the rules broadly – to cover a wider range of firms than MiFID II (such as AIFMs, UCITS managers, third country investment firms and oil and energy market participants).
Other organisational changes have significant impact:
- Taping obligations are extended.
- If the draft proposals in SYSC 10A.1.6 R are adopted, firms will need to take all reasonable steps to record telephone conversations and keep a copy of electronic communications that relate to a range of activities (such as arranging deals in investments, dealing in or managing investments). This subtle difference in wording from the provisions of COBS 11.8.5 and 11.8.8 R presents an uptick in the obligations to which firms are subject. Currently in scope conversations and electronic communications are those that conclude an agreement and, for professional clients and eligible counterparties, those carried on with a view to conclude an agreement.
- It is worth noting that ESMA has a panoramic outlook about this: for example, in its Q&A guidance, ESMA is clear that internal conversations should be considered as in scope and, if outsourcing, taping will be considered a critical or important operational function.
- MiFID II taping provisions extend to all MiFID financial instruments rather than qualifying investments only (to align the Market Abuse regulation and MiFID II);
- The record retention period is moved out from 6 months to 5 years (sometimes 7 years) – with knock on cost implications and data storage contracts requiring refresh; and
- Prescriptive organisational measures are set out in a delegated implementing regulation. A new SYSC 10A is being introduced to the FCA Handbook (COBS 11.8 will be deleted), which cross references fine detail in Art 76 of the directly applicable Org Reg. (See Art 16(6) and (7) Directive 2015/65/EU Commission delegated regulation of 25 April 2016 (2017/565/EU) section 8 art 72 - 76 (the Org Reg ), ESMA Q&As (4 April 2017 ESMA35-43-349) and the FCA’s CP 16/29 )
Leaders heads up
The prescriptive governance requirements are an area where senior managers need to pay attention. Based on clear statements in the Org Reg combined with powers to remove Board members (see Article 69(2)(u) MiFID II) as well as statements in CP16/29 (see para 15.10), the management body will need to have effective oversight of compliance with recording obligations. This includes having a written policy, training staff, and alerting clients that they have the right to a copy of the recordings, on request.
Article 3 retail financial advisers will have some additional flexibility as the FCA aims to keep rules proportionate. If not taping, these firms can prepare analogous records. Further detail will be provided on what is meant by meeting “at least analogous” record keeping requirements, but it is likely to include measures such as note-taking policies applied at a firm-wide level rather than on a piecemeal basis.
This rowing back by the FCA from its position in CP16/29 is welcome and proposals such as contemporaneous note-taking are likely to be good practice. Firms will have some difficulty suggesting this is an onerous burden, particularly as the FCA links this explicitly with mis-selling concerns. Helpfully the FCA flags that this is an area that is likely to see a post-implementation review and so firms know to address policy and practice in this area as a relative priority.
A change to flag is the shift in focus from telephone recording being merely a tool to ensure market integrity towards one for monitoring general compliance and, through this lens, it is easy to see why taping obligations are being applied to more communications, more financial instruments are in scope and why the FCA is prepared to extend it to other firms. And it is not just the regulator that will scrutinise these records – as MiFID II grants clients the right to receive copies of records, they are likely to become a prominent evidential factor in firm-client disputes.