On 11 November 2010, the UK’s Financial Services Authority (“FSA”) published its latest policy statement (http://www.fsa.gov.uk/pubs/policy/ps10_17.pdf) (the “Policy Statement”) with amendments to its rules on the recording of telephone conversations and electronic communications.1 From 14 November 2011, FSA-authorised firms must (unless an exemption applies) ensure that all relevant communications relating to client orders made from equipment owned by the firm are recorded and retained. FSA-authorised firms must consider what “reasonable steps” they need to take to ensure that such communications do not take place on private communication equipment and should also consider making possible amendments to their own policies and procedures.
The FSA’s Current Rules on Recording Orders
The General Rule
Unless they are otherwise exempt (see below), all FSA-authorised firms (including discretionary investment managers) that receive or execute client orders, arrange for client orders to be executed or place orders with other entities for execution that result from firm decisions to deal on behalf of their clients, are required to record (and retain for a minimum of six months) a record of the telephone calls or copies of electronic communications relating to those orders or dealing transactions.2
The specific calls or electronic communications that must be retained are those that relate to orders for transactions involving qualifying investments3 that have either been admitted to trading on a prescribed market4 or that have requested admission to trading on such a market (this can also include investments that are related to such qualifying investments5)(“Relevant Communications”).
At present, the rules require firms to take “reasonable steps” to record all Relevant Communications (through either recording telephone conversations or making copies of relevant electronic communications) made with, sent from or received on equipment that has been provided by the firm to an employee or contractor or that has been permitted by the firm for an employee or contractor to use. This can include the firm’s computers, Bloomberg terminals, land-line telephones and BlackBerries.
The rules previously contained the following three exemptions:
- Telephone conversations and electronic communications (except emails) made with, sent from or received on mobile telephones or other mobile handheld electronic communication devices are exempt from the recording requirement (the “Mobile Phone Exemption”).
- Telephone conversations or electronic communications made with, sent to or received from another FSA-authorised firm by a discretionary investment manager, which the discretionary investment manager reasonably believes is subject to the recording obligation, are also exempt (the “COBS 11.8.6(2) Exemption”).
- Infrequent telephone conversations or electronic communications (representing a small proportion of the total) made with, sent to or received from a person who is not subject to the recording obligation by the discretionary investment manager are also exempt.
Changes to the Recording Rules
Removing the Mobile Phone Exemption
In March 2010, the FSA consulted6 on proposals to remove the Mobile Phone Exemption from its recording rules and the Policy Statement is the FSA’s response. The FSA has confirmed that the Mobile Phone Exemption will no longer be available. Removing this exemption will mean that FSA-authorised firms will be required to record and store, for a period of six months, all Relevant Communications made with, sent from or received on mobile phones and other handheld electronic communication devices (including telephone calls from firm BlackBerries) that are issued by FSA-authorised firms for business purposes — as well as Relevant Communications made from land-line telephones, email, etc.
In addition, the FSA has also introduced a new rule that requires FSA-authorised firms to take “reasonable steps” to ensure that Relevant Communications do not take place on private communication equipment, which, for privacy reasons, FSA-regulated firms are not permitted to record. Such private communication equipment includes employees’ private mobiles, private handheld mobile electronic communication devices and private non-mobile electronic communication devices.
The “reasonable steps” are not specifically defined by the FSA. In the Policy Statement, the FSA notes, “What constitutes 'reasonable steps' is fundamentally principles-based, meaning that we are not prescriptive about what we expect from firms to be compliant. Each firm must decide what it deems necessary and reasonable to comply with the taping provisions.” Firms will therefore have to draft policies appropriate for their businesses, ensuring that the policies are consistent with the overall letter and spirit of the FSA’s rules and ensuring that the firms themselves are actively taking reasonable steps to prevent Relevant Conversations from taking place on their mobile phones.
Any firm that decides to act beyond the requirements of the FSA rules by recording their employees’ private mobile phone communications must take care to ensure that they are doing so within the limits of privacy legislation.
Interaction with EU Rules
The FSA has stated in the Policy Statement that removing the Mobile Phone Exemption would give them a further source of voice and electronic communication evidence, on top of voice and email communications from fixed lines at firms (which are already recorded and stored), to help them combat market abuse and “increase the probability of successful enforcement".
Widely divergent rules on recording apply across the EU, and the FSA rules are only applicable to FSA-regulated firms. However, the European Commission’s current review of the Market Abuse Directive looks set to extend the communications-recording regime across the EU. In the Commission’s consultation,7 published on 25 June 2010, the Commission states that one of its key objectives is to strengthen effective enforcement against market abuse — and, significantly, it envisions a modification to clarify that the EU E-Privacy Directive8 does not preclude EU regulators from obtaining any and all telephone and data traffic records that they require when investigating suspected cases of market abuse (subject to certain conditions).
The Mobile Phone Exemption will cease to apply and the other, subsequent changes to the recording rules, referenced above, will take effect from 14 November 2011.
From 14 November 2011, FSA-authorised firms will have to ensure:
- That all Relevant Communications made from equipment owned by the firm are recorded and retained (unless another exemption applies); and
- That they have considered what “reasonable steps” they need to take to ensure that Relevant Communications do not take place on private communication equipment — with amendments to their policies and procedures reflecting any such changes.
Those FSA-authorised discretionary investment managers that currently rely on the COBS 11.8.6(2) Exemption — meaning that they do not record any Relevant Communications on the basis of a reasonable belief that the call is being recorded at the other end of the line — are likely to find that the removal of the Mobile Phone Exemption is of little concern. However, such firms should still consider what “reasonable steps” they need to take to ensure that Relevant Communications do not take place on private communication equipment. They could, perhaps, initiate a prohibition on staff placing client orders using private mobile phones and make associated amendments to the staff handbook to ensure that the firm’s policies and procedures reflect such changes.
Other firms that are currently recording Relevant Communications should assess over the coming months what the impact will be for them of the removal of the Mobile Phone Exemption and what systems changes they need to make to ensure that Relevant Communications made on firm devices are also recorded from 14 November 2011. These firms should also consider whether staff should be prohibited from placing any client orders using private mobile phones and whether associated amendments needs to be made to the staff handbook.