By Rob Moulton and Axel Schiemann
ESMA, BaFin, and FCA have provided guidelines on firms’ obligation to record client telephone calls.
Remote working raises uncertainties in various regulated areas as it dramatically changes institutions’ day-to-day business. In particular, institutions are confronted with practical and technical difficulties regarding client-related requirements such as the obligation to tape telephone conversations with clients — which employees working remotely may not be able to do because they lack access to the necessary technical equipment. In order to address these practical difficulties, the European Securities and Markets Authority (ESMA), Germany’s Federal Financial Supervisory Authority (BaFin), and the UK’s Financial Conduct Authority (FCA) have published their regulatory approach with regard to the current situation.
- ESMA: Acknowledging these implementation difficulties, ESMA stated on 20 March 2020 that it expects institutions to consider alternative measures to ensure the recording of client conversations. An alternative could be to prepare written minutes or notes of the telephone conversations, subject to prior information being provided to the client of the impossibility of electronic recording, and that written minutes or notes of the call will be taken instead. Nevertheless, ESMA stated that institutions are expected to deploy all possible efforts to restore electronic recording as soon as possible.
- BaFin: On the same day as ESMA’s statement, BaFin announced that it would adopt ESMA’s approach in respect of the recording of telephone conversations and furthermore, it would extend this approach to all client-related requirements. However, BaFin clarified that no waivers can be granted with respect to the client-related rules, as the German Securities Trading Act does not stipulate such a waiver. Instead, BaFin stated that it will not penalize respective offences if institutions take appropriate alternative measures to close the documentation and information gap resulting from the offence. Additionally, institutions have to inform their customers about the measures taken.
This approach aligns with BaFin’s statement of 12 March 2020 in which BaFin set out that it might be necessary — especially amidst a crisis — to relax the strict trading rules and to temporarily allow remote working (including also trading activities outside of institutions’ premises). According to BaFin, all required security measures and audit activities could be implemented electronically and therefore working remotely would not, in general, contradict the regulatory risk management requirements.
- FCA: In the UK, the FCA published (17 March 2020) an update covering a number of areas that would be immediately impacted by COVID-19. The topics included guidance on firms’ obligation to tape certain phone lines. The FCA accepted that scenarios could emerge in which such recordings would not be possible, and asked firms to notify such situations to the FCA. The FCA’s expectation is that future steps would include “enhanced monitoring, or retrospective review”. The FCA has been asked whether written records could suffice in the absence of telephone taping systems (because, for example, there had been a failure caused by their overuse, or an inability to fully support this functionality given the various IT demands caused by home working). The FCA indicated that it did not believe that this approach would be acceptable. But in reality, the FCA may react differently when a firm had sound back-up plans that, for unexpected reasons, have not fully worked, compared to a firm that lacked back-up plans that were likely to be operable. Industry has viewed this response as strict, and somewhat out of line with flexibility that has been shown by the FCA in other areas.
This post was prepared with the assistance of Vanessa Sekker.
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