The Walls Have Ears

In March 2009, the Financial Services Authority (FSA) took steps to tackle the potential for market abuse, and to aid its conduct of businesses supervision, by ensuring it had access to high quality, “contemporous evidence to help monitor, investigate and prosecute such cases” – putting in place rules to record voice conversations and electronic communications.

The regulations, which were originally published to the industry in March 2008, stated that firms – including banks, stockbrokers, investment managers, financial and commodity derivatives firms – must record relevant communications and keep them for six months. These communications, the FSA said, relate to “voice conversations and other electronic communications that involve the receipt of client orders and negotiating, agreeing and arranging transactions in the equity, bond and financial and commodity derivatives markets”. Under the rules, communications that are required to be recorded and retained include fax, email, chat and instant messaging. “The ruling was for the prevention, detection and deterrence of market abuse such as insider dealing and market manipulation,” explains Trevor Penfold, senior consultant at PTS Consulting.

However, there was one exception to the methods of communication relevant to the rules – transactions carried out via mobile phones. “This is quite a loophole,” says Paul Manyweathers, CyberTech's director of global business development. “While calls must be recorded and kept for a period of time, those made by traders on their own mobiles were exempt, and there is no recording, logging or legislation around it.”

In its rules (PS08/1), the FSA stated that at the time of making the decisions on what to include in the recording regulations it was concerned that there was “insufficient” development in technology to capture these communications via a mobile phone. But the regulatory body warned in the Paper that it would be reviewing this exemption in due course, from both a technology and a cost point of view.

The FSA has now released its Consultation Paper 10/7: Taping: Removing the mobile phone exemption, looking at the potential for removing this exemption and extending the rules to cover relevant communications, except emails, that are “made with, sent from, or received on a mobile telephone or other mobile handheld electronic communication device.”

In addition, the FSA is recommending the introduction of a rule that would see firms take reasonable steps to prevent employees and contractors from using private communication equipment which cannot be recorded, due to privacy laws, to make such communications.

But will these proposals, on which a decision is expected to be taken in Q4 2010, make it to implementation, and what are the issues surrounding them?

Technological advances
In its Consultation Paper, the FSA explains that it has chosen to look now at removing the exemption thanks to advances in the technology world. The Paper states there is now a plethora of technology options to record, store and retrieve mobile communications, and so now is the time to look at removing the “loophole” of allowing these risks of trading via a mobile phone.

But will the firms required to adhere to these regulations be particularly enamoured with the idea? Manyweathers is not so sure: “It's a real mixed opinion from the banks. Some I have spoken to say they are not going to do it, even though they recognise that there really are benefits. I think in reality, most of the banks will turn around and say they will do it when the regulation says they have to, but now there is probably just
a handful that have gone live and started to record.”

“The firms would be obligated to abide by the FSA’s directive,” adds PTS Consulting’s Penfold. “Therefore, they will either allow mobile phones to be used and record accordingly, or through the development of internal policies to prevent the use of mobile phones for relevant conversations.”

It will be down to the firms themselves via their compliance departments, Penfold says, to ensure that the rules are fully abided by.

But member firms will have two options: either they internally allow for mobile phones to be used for trading, and put in measures to ensure they are recorded; or they develop internal policies to prevent employees from discussing market information on mobile phones.

Will this help or hinder suppliers? “A few companies came out of the woodwork saying ‘we can do that’, and it has evolved from there. The company may choose to provide a means to record trading that takes place on mobile phones, but there is that ‘out’ for banks in that they can stop providing mobiles to employees. From our perspective we are looking at it

as a recording company, which is fantastic – a big business opportunity for us. But in reality, many banks are turning round and saying, ‘you know what? We won't provide them with the mobile phones’. So it’s not all great business as a result for everybody,” says Manyweathers. He thinks, however, more suppliers could emerge, eager to get in on the action. “What will happen is, if the regulation changes, there will be a lot of people jumping on the bandwagon and saying they want to get something that can provide this. I also think you will find a lot of the major mobile telephony providers start to provide this as a service, and that may well be patching off to a recording device that is ours. But you might find a telephony provider packaging up this service,
or a concept of having a service for an extra price – a ‘pay as you go’ idea.”

However, the banks and technology suppliers should be granted a grace period, suggests Penfold. “The FSA is due to make its decision by the fourth quarter of this year and I believe that it will remove its exemption on the recording on mobile phones. It is likely that the FSA will give one year to enable member firms to become compliant so the exemption will be lifted towards the end of 2011.”

So it seems likely that the financial sector can look forward to yet more regulation and teeth-baring from the FSA. Despite the FSA choosing not to comment on the proposals until a decision is made as to whether they will be set in stone later this year, it certainly looks like the walls will have ears.

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