FCA’s Market Watch 66 Establishes Clear Expectations for Firm’s Monitoring and Surveillance
The UK’s Financial Conduct Authority (FCA) cannot be accused of being asleep at the wheel when it comes to issuing guidance during the pandemic. Since the beginning of March last year, the FCA has released around 170 ’Policy and Guidance’ documents which include the word "coronavirus," including four in its Market Watch series. The latest, Market Watch (’MW’) 66, issued on Monday 11 January has the catchy sub-title, ’Recording telephone conversations and electronic communications.’
FCA guidance on what must be recorded is nothing new. For decades, dealing rooms have recorded lines. It’s no wonder the phrase ’check the tapes!’ has become an integral part of trader vernacular. Following the implementation of data privacy rules, new regulations in 2009 formalised what was to be recorded and the list has only grown since.
Likewise, early in the pandemic, working from home transitioned almost overnight from being seen as part of an enlightened work-life balance, to a health necessity. When this happened, many firms were not sufficiently equipped with the right compliance infrastructure to support growing proportions of staff working from home. As a result, the FCA advised regulated firms that it would grant a degree of forbearance as firms tried to adapt to the ’operational challenges’ of distributed work environments.
But the relief was only temporary. In the steady drumbeat of updates, the FCA clarified that this did not mean regulations themselves were being relaxed. Furthermore, sooner rather than later, firms would be expected to beef up their compliance infrastructure to meet the new demands. Given the sea change in working practices, this would necessitate re-thinking and in many cases, re-tooling control environments. In MW 63, a bumper 9-page edition published in May 2020, the FCA reiterated that their expectations were unchanged: market integrity and conduct must be maintained, even in the context of coronavirus.
The message evolved over the summer, with the FCA communicating that the adjustment period was coming to an end and that firms would shortly be expected to have fully implemented their contingency plans – arguably now less ’contingency’ than ’the new normal.’ This past week, again, with the publication of MW 66, the FCA has once again cast its expectations in stone with respect to voice and electronic communications recording.
MW 66 contains no new regulations or major shifts in policy outlook. Rather, it highlights the risk from reduced communications monitoring, and reinforces a message that firms should already know: 1) that their voice and electronic communications recording policies need to be up-to-date; 2) that these policies must include arrangements for coverage of home-working and; 3) that firms must be able to demonstrate their compliance to the FCA upon request. Consistent with an emphasis on accountability, Senior Managers are called out in terms of being responsible for setting the correct culture and conduct.
The monitoring message harks back to MW 63 which asserted that monitoring and surveillance were critical and that firms should review their surveillance systems to ensure that they are ’adequately and appropriately calibrated’ for today’s heightened risks.
What’s the key takeaway?
While so much has changed around us in the past year, some things have stayed the same. Monitoring and surveillance is essential. In fact, it’s now more essential than ever.
Given the direction and mindset of the FCA, and in light of the new normal, your firm should take steps to shore up its monitoring and surveillance programs, if it hasn’t done so already. Some things to consider:
- Update your voice and electronic recording policies to include all modalities that might be adopted during remote work (e.g. unified communication tools like Microsoft Teams and mobile text messaging apps like WhatsApp, etc.). Make sure your compliance recording solution is equipped to record these as well.
- As you conduct annual vendor reviews, ask with your surveillance vendor what behavioural analytics capabilities they offer, and how they can potentially support a shift to a more risk-based approach to conduct surveillance.
- Digital channels are here to stay, and this means even more data. In order to manage the increased data volumes without dramatically increasing operational costs, you should consider Artificial Intelligence. Many surveillance vendors say they offer AI, but not all are created equal. Be sure to ask your vendor for specific use cases they’ve deployed, and how they can help your firm more efficiently monitor for risks.