Additional MiFID II regulatory scrutiny from FCA?

Article 3 firms provided relief under latest FCA Publication

The Financial Conduct Authority (FCA) in the UK has recently published a Policy Statement that says: "Based on the responses received and following extensive industry engagement, we have concluded that additional flexibility for all Article 3 retail financial advisers is appropriate. This is because the business model of many of these firms is such that a full taping obligation may not always be proportionate. As such, we will propose that these firms, irrespective of size, can comply with the ‘at least analogous’ requirement by either taping all relevant conversations or taking a written note of all relevant conversations. The decision to tape or take a note should be taken at the level of the firm rather than in relation to individual relevant conversations or the relevant conversations of different advisers."

Firms must be extremely careful in evaluating which method they decide to use, as the FCA does not specifically set out guidelines, leaving this latest amendment open to various interpretations. In the case of firms that decide that allowing employees to take notes versus a voice recording solution, it may open them up to additional regulatory scrutiny. Here are 3 reasons why:

  • First, the FCA has yet to make a determination on exactly what information must be captured and written down within the notes. The statement addresses this: "We are still in the process of determining what details firms must include in this note, ahead of the full rules being published in June. This is because in order for the note to meet the ‘analogous’ requirement under MiFID II, it must have an analogous outcome in terms of advancing our consumer protection objective. Firms will not be able to rely solely on their current record keeping requirements to meet this objective."
    Every conversation with a customer or other financial institution are not the same, and trying to figure out what information must be noted to encompass all potential scenarios seems like unnecessary work. Also, this will need to be maintain and reviewed to ensure no new information needs to be added. In this climate, with the amount of requirements and process compliance firms are already facing, adding another to an already stressed team doesn’t not seem like a good choice.

  • Secondly, how will firms capture, retain, review and monitor these notes? Again, with the amount of data that firms need to be able to store and look at, this will just add additional data to an ever growing environment. Although the FCA uses the word, 'Notes', I highly doubt that firms will rely on a post-it note. They will need to explore new options to first be able to add custom fields, than implement business wide, ending with another system employees will have to look at and understand how to use and why they are using it.

  • Next, just like other issues firms face, with only being able to enforce by policy, it will provide a very tough task to provide evidence that employees are properly filling out forms and are not engaging in any type of fraudulent behavior, which as we know, is the major reason for all of this regulation. The policies the firm puts into place, will be worth as much as the paper they are written on, unless they can support with evidence they are enforcing them.

Lastly, the FCA also states - "This flexibility will not be available to MiFID investment firms who can be characterized as retail financial advisers". Firms must make sure, they categorize themselves correctly and do not try and utilize this exemption if they are not entitled too.

Sometimes the intended relief only makes matters more complicated

Although it appears that the FCA is giving relief to some Article 3 firms, this relief comes with the potential for increased regulatory scrutiny if firms should decide to exercise the alternative to a voice recording program. With the technology being provided and most firms having some type of voice recording program already implemented somewhere within their organization, an expansion to include those needing voice recording seems like a better choice. Firms are already looking to streamline their business wide communications surveillance to a unified solution to apply advance applications to detect potential risky behavior and to give compliance analyst a single interface to select, review, escalate, resolve and evidence the various communication channels its employees are using, including voice, email, Bloomberg chat, Yammer, ICE chat and others.

 


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