Ensure call recording systems are adequate to avoid regulatory penalties

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Monitoring trader activities is a key regulatory obligation as it is central to the identification of trader misconduct or market abuse. The high-profile fining of an investment bank last week is the latest in a long line of regulatory action against firms for manipulating benchmark rates as a result of trader misconduct, highlighting the need to ensure a greater level of monitoring.

An adequate call recording system is a necessary tool for monitoring misconduct. Weaknesses within the call recording system, and the systems and controls around it, were cited as core reasons for failings within this notice.

In this blog, Recordsure looks at the core failings that led to this fine and explores where call recording systems could be strengthened to help prevent the risk of misconduct and market abuse.

Rules & principles

Core rules for the recording of telephone conversations are set out in COBS 11.8 and there are also general record keeping rules set out in SYSC 9 that firms must comply with.  However, in this notice the FCA fined the firm for breaches of principles rather than rules. Principles are less prescriptive than rules and are a general statement of the fundamental obligations for firms under the regulatory system. Within this notice, the firm was in breach of:

    1. Principle 3 – Management and control: A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems
    2. Principle 5 – Market Conduct: A firm must observe proper standards of market conduct
    3. Principle 11 – Relations with regulators: A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expert notice.

Firms need to ensure that they are able to evidence they are adhering to the FCA’s principles. This is at the core of the FCA’s expectations.

Robust systems and controls

Firms need to ensure they have robust systems and controls in place to manage risks to the business, notably:

 

  • Firms are required to have specific systems and controls in place where significant risks to their customers or the market are identified. Firms should have adequate record keeping in place to ensure that it is known which individuals submit rates and trades, and the rationale for those actions.
  • Individuals should be adequately trained on the processes they are responsible for undertaking and firm’s should have a framework in place for ensuring individuals are assessed and signed off as competent.
  • Firms are required to identify any inherent conflicts of interest and where any conflicts are identified, in this case where the same group of traders are submitting rates and also trading derivatives directly impacted by those rates, manage those conflicts effectively. Effective monitoring of Traders conversations is one area that can assist within managing these conflicts adequately.

Firms should regularly test their recording systems to ensure they are sufficient in four core areas:

  • Can recordings be accessed and retrieved within a reasonable timeframe?
  • Do systems allow monitoring of individual recordings for a specific area of focus e.g. a trading instruction or individual trader?
  • Do systems identify and flag up trends or patterns of behaviour or misconduct over a period of time?
  • Do systems record and identify which trader was responsible for an individual trade to assess the conduct of individual traders?

If firms are not satisfied that the above questions can be met with a ‘yes’, the system in use may not be adequate.

A solution to inadequate systems

In this case, failure to implement appropriate systems and controls to identify the activities of individual traders meant that trader misconduct went unchecked and it took over two years to provide the FCA with the requested phone recordings. In addition, the firm accidentally destroyed a proportion of calls during the relevant period.

The firm in this notice used inadequate systems for identifying and recovering recordings or Trader telephone calls and mapping trading books to Traders. It is not enough to record all telephone interactions, firms must also ensure that their systems and controls allow them to retrieve records accurately and in a timely manner, whether they are required for internal purposes or requested by the regulator.

Use of a conversation recording system such as Recordsure assures firms that data and records can be simple to access, search and retrieve instantaneously.

Regulatory action could have been avoided if the firm was able to identify instances of market abuse in the first place. Consequently, monitoring the content of traders’ conversations is crucial. Firms should have an audio recording system, like Recordsure, that enables accurate identification of conversations that are deemed to be a risk to the firm’s integrity and aggregates data so that trends and anomalies can be quickly and efficiently identified and dealt with.

 

Media Enquiries

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