The European Securities and Markets Authority (ESMA) has published a public statement to clarify issues regarding the application to firms of the MiFID II requirements on the recording of telephone conversations. ESMA recognizes there may need to be tweaks in the exceptional circumstances created by COVID-19.
Under Article 16(7) of MiFID II, credit institutions and investment firms are required to record telephone conversations or electronic communications relating to, at least, transactions concluded when dealing on own account and the provision of client order services that relate to the reception, transmission and execution of orders.
ESMA has previously issued Q&As on the application of these requirements which, among other things, require firms to take all reasonable steps to prevent a person from making, sending or receiving relevant communications on devices that the firm is unable to record or copy.
ESMA indicates in this latest statement that it recognizes that, considering the exceptional circumstances created by COVID-19, some scenarios may emerge where, notwithstanding steps taken by the firm, the recording of relevant conversations required by MiFID II may not be practicable. This could occur, for example, due to the sudden remote working by a significant part of staff or the lack of access by clients to electronic communication tools.
Under these exceptional scenarios, if firms are unable to record voice communications, ESMA expects them to consider what alternative steps they could take to mitigate the risks related to the lack of recording.
By way of example, ESMA states that this could include the use of written minutes or notes of telephone conversations when providing services to clients. However, this is subject to firms:
- firstly, informing the client that it is impossible to record the call and that written minutes of notes of the call will be taken instead; and
- ensuring enhanced monitoring and ex-post review of relevant orders and transactions.
Firms are expected to deploy all possible efforts to ensure that such measures remain temporary and that recording of telephone conversations is restored as soon as possible.
In the UK, the Financial Conduct Authority (FCA) is taking a similar stance. It stated in an earlier announcement that firms should continue to record calls, but it accepts that some scenarios may emerge where this is not possible. Where this is the case, firms must inform the FCA that they are unable to meet the normal requirements.
The FCA expects firms to consider what steps they could take to mitigate outstanding risks if they are unable to comply with their obligations to record voice communications. While the FCA does not expressly make reference to written minutes and notes, this is clearly a reasonably mitigating step that should now be taken by firms in light of ESMA's statement. The FCA also suggests that mitigating steps could include enhanced monitoring or retrospective review once the situation has been resolved.
The US Commodity Futures Trading Commission also indicated last week that it has issued "no-action letters" to firms relating to recording, among other things, in light of the displacement of staff due to COVID-19.
This temporary relief is to be welcomed as you struggle to maintain daily business in challenging times. However, you must keep national regulators informed and be mindful that the relief is only temporary and normal recording should be resumed as soon as possible.
Keep a watchful eye on our COVID-19 hub for further updates. Please get in touch for advice on any aspect MiFID II compliance, your business continuity and operational resilience.