On 3 March 2008, the United Kingdom’s Financial Services Authority (FSA) published Policy Statement 08/1 (FSA Policy Statement 08/1: “Telephone Recording: recording of voice conversations and electronic communications”), which contained its final set of rules relating to the recording and retention of electronic communications by financial services firms. The new rules, which are scheduled to come into force on 6 March 2009, will apply to all firms that receive client orders and negotiate, agree and arrange transactions across the equity, bond and financial commodity and derivatives markets.
Firms subject to the new rules will be required to record and store all communications - including telephone calls, e-mail, instant messages and faxes with individuals and entities inside and outside of the United Kingdom - in a form that will allow the FSA ready access should it so require. The new rules will not apply to mobile telephone communications, although this position is due to be reviewed in September 2009.
The new rules were first proposed by the FSA in Consultation Paper 07/9 (FSA Consultation Paper CP 07/9: “Conduct of Business regime: non-MiFID deferred matters (including proposals for Telephone Recording)”), which was published in May 2007 (CP 07/9). The FSA strongly felt that the recording of telephone and other electronic communications both was necessary and desirable to help deter and detect market abuse more effectively in the United Kingdom. Market abuse is one of the most difficult offences to investigate and prosecute because of evidential uncertainty.
Following the publication of CP 07/9, the FSA launched a consultation process, in which it sought the views of trade associations, industry bodies and market participants that would be affected by the introduction of the new rules. As a result of this consultation process and the broadly negative reaction the proposals received, the final version of the new rules were diluted significantly from those originally published in CP 07/9. For example, the FSA’s original plan was that all recordings would need to be stored and accessible for three years, whereas the period in the new rules has been reduced to six months.
Another change, which the FSA has acknowledged since publication of CP 07/9, is that the implementation of the new rules will cost the industry significantly more than originally envisaged. In CP 07/9, the FSA estimated that the industry would face a one-off set-up cost of £3 million to £4 million, and annual expenses of £3.5 million to £4.5 million. However, largely as a result of the extensive and ongoing industry consultation since then, these numbers have been revised upwards to a one-off set-up cost of £9 million to £14 million, and annual expenses of £6 million to £11 million.
Despite the implementation costs, the FSA has pointed to the long-term economic benefits which will flow to all market participants from the new rules:
- Taped evidence, because it is contemporaneous, may increase the possibility of successful enforcement.
- In turn, successful enforcement actions diminish the value to be gained from engaging in market abuse.
- In theory, this shift should lead to both increased market confidence and greater price efficiency.