Out on a wire: when do asset managers need to record mobile phone communications?

Background

In advance of a rapidly approaching deadline, many financial services firms in the UK are currently gearing-up to meet a new rule introduced by the Financial Services Authority (“FSA”) requiring the recording and retention for at least six months, of order and trade related conversations made on mobile phones.

The FSA’s yearning for additional sources of information to assist it to tackle market abuse led to the introduction in March 2009 of rules on the recording and retention of voice and other electronic communications. Then, mobile phones were expressly exempt because of concerns about the adequacy and perceived high cost of the software needed to support the new regulations. However, since then with the eager assistance of technology providers, the FSA has got comfortable that the technology needed to record, store and retrieve mobile communications has sufficiently advanced. Accordingly, the industry was given a year’s notice of the reversal of the mobile phone exemption, the deletion of which officially occurs on 14 November 2011 when voice recording must be applied to mobile phones issued by the firm for business purposes and also other phones the use of which for business purposes has been sanctioned or permitted by the firm.

Firms within the scope of the rules are now also required to take “reasonable steps” (which in practice means through the adoption and implementation of appropriate policies, controls and monitoring thereof) to prohibit the conduct of relevant conversations on telephone devices that the firm does not or cannot record. Indeed, given the costs involved with recording, firms will wish to limit the number of devices to which the recording solution need be applied. Indeed, this is consistent with the desire and need to control the environment in which trading takes place. The FSA’s £72,000 fine levied against Steven Perkins for market abuse committed in trading conducted away from the firm’s premises, outside of business hours and while he was extremely drunk vividly demonstrates this.

Moreover, the more lines that are recorded, the more that need to be monitored by compliance staff in an attempt to pre-empt a regulatory inquiry.  In more ways than one, don’t make a rod for your own back.

What next for asset managers - do these rules apply?

Asset managers should use this reversal of the mobile phone exemption as an opportunity to revisit how (and indeed if) the voice recording rules apply to them. There is a chance that the rule change may not in practice impact them at all.

The voice recording rules apply to certain conversations about transactions in instruments traded (or admitted to trading whether or not there is actually any or much trading) on public markets and prior to the introduction of the rules in March 2009, a large number of asset managers were delighted to realise that either the rules did not apply to their activities or that they were able to rely on an exemption.

In early 2009, the FSA helpfully acknowledged in writing that the majority of transactions undertaken by private equity or venture capital firms, whose business activities involve investment in and the growth of privately held companies, were outside the scope of these rules. Even private equity firms that have regular or occasional involvement with public markets (perhaps at the acquisition or disposal stage of a company) are only likely to trigger the voice recording obligation at the business-end of such a transaction and not throughout its likely lengthy negotiation.  And even these culminatory conversations may be able to avail of the extremely valuable “discretionary investment manager” exemption.

The exemption for a “discretionary investment manager” is a precious, yet highly pragmatic exemption that was added to the rules in the course of their consultation in 2007/8. It exempts calls made by asset managers to UK brokers subject to the very same voice recording rules and also tolerates a limited amount of calls made to overseas brokers (who may not be recording their incoming lines in the absence of compulsion and in any event will not be compellable by the FSA to turn over their records) provided that such calls are infrequent representing a small proportion of the manager’s orders and/or trades placed by phone and/or electronic communication.

Discretionary investment managers that occasionally call non-UK brokers should assess both now and on an ongoing basis whether use of this “de minimis” provision remains valid. Firms should consider if the number of calls to overseas brokers has increased in number or regularity, perhaps in response to changing market conditions or in pursuit of a slightly different trading approach or focus within an investment strategy. Firms are reminded that the exemption only provides relief for ex-UK calls which are infrequent in nature and peripheral in the context of all order and trading communications. The assumptions you have made in the past about future trends can and should now be verified and reset.

Conclusion

If the rules do not apply to the firm’s activities or if the firm may use the exemption for a “discretionary investment manager”, the deletion of the mobile phone exemption has no impact.  However, firms should now assess whether their activities have changed (perhaps with regard to the types of instruments involved and the nature of the conversations that the firm has) with the consequence that the rules may now apply.

Firms that conduct a timely and accurate analysis of the application of the voice recording rules to their business and then respond accordingly (as necessary) need not be anxious about the impending deadline. They should not let themselves get caught up in the excitement of technical specifications if the rules do not in fact apply to them. With regard to the rules and the policy behind them, the FSA’s policies paper from 2008 and 2010 on the subject remain the definitive works.  Firms should be wary of some technology providers who have been seen in their literature to have interpreted the parameters of the policy to achieve an outcome that increases the size of their consumer base.

If you require assistance interpreting the voice recording rules or revisiting them at this time in the context of your business, IMS is able to help.

If you have any questions regarding this subject, please contact Peter Moore, Stephen Burke or Alan Leale-Green. Alternatively telephone 020 7408 2448 to speak to your usual IMS contact.