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FinTech top tips: How to prepare for new EU financial instruments regulations

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James Foley, vice president of customer service, BT smartnumbers, explores how the revised Markets in Financial Instruments Directive will impact the financial industry.

The revised Markets in Financial Instruments Directive, known as MiFID II, comes into force in January 2018. It aims to strengthen financial stability by ensuring maximum transparency, so the new requirements will apply to all firms who provide financial services to clients linked to ‘financial instruments’ (shares, bonds, units in collective investment schemes, commodity trades and derivatives) as well as to the venues where those instruments are traded.

So, whether you are in financial markets or giving advice, you will need to transact with customers in a more transparent way. It will mean a review of your business processes, including the recording and storing of conversations.

UK FinTech firms ‘raised $328m in Q1 2017’

Increased scope for recording conversations

Currently, requirements for recording phone calls apply only to individuals directly involved in trading – about 30,000 traders in the City – but anyone involved in the advice chain that may lead to a trade is included under MiFID II. This could include relationship managers in retail banks, independent financial advisors (IFAs) and wealth managers – in fact the number of individuals falling under the regulation could potentially increase to 300,000 in the UK alone.

The Directive also includes premises in which these calls or conversations take place, and requires that all “communications that are intended to lead to a transaction” be recorded and retained. Recordings will also need to be stored for longer – five years minimum against the six months currently required.

Pay close attention to data privacy

Recording of fixed line and mobile calls has been mandatory for traders since 2011, but the EU General Data Protection Regulation (GDPR), which comes into force at the same time as MiFID II, will require firms to pay attention to recording of conversations in the context of data privacy. The GDPR replaces the 1998 Data Protection Act, and strengthens protection given to individuals on the data held about them. Under GDPR, firms will face higher fines for data misuse – potentially 4% of turnover.

Mobile recording

Mobile phones may well be used for both business and personal purposes, so firms will need to consider how they record business calls without also recording personal calls. Even if the recording is never listened to, the organisation risks breaching GDPR if it records personal calls.

MiFID II expects firms to have robust oversight of the infrastructure that regulated users are using to collaborate with customers. So they should maintain a record of those individuals who are using both company-provided and approved privately-owned mobile devices, and should have processes in place for the routing, reviewing and monitoring of conversations on these devices.

Fixed line recording

The FCA has mandated the recording of fixed-line telephone calls in the UK since 2009, both to reduce the risk of insider trading and to provide transparency. As more organisations are adopting cloud-based services, including the storage and management of call recordings, the old-school premises-based solutions are no longer adequate. Firms are looking for cloud-based call-recording services. And as staff become more geographically diverse and remote working becomes increasingly normal , firms need to ensure that calls to fixed-line numbers are recorded no matter where staff may be working, across any location and all types of devices.

Face-to-face recording

Earlier this year the FCA clarified the intention of the MiFID II Directive on audio recordings of face-to-face meetings – they will not be compulsory, as some had thought. However, the Directive implies that any records made must be kept in a durable medium and able to withstand the same scrutiny as those recorded by phone.

So it is essential that firms have policies, processes and safeguards to ensure that minutes of face-to-face conversations are accurately recorded and monitored, since it is the responsibility of the firm to ensure that these processes are in place, not the client. Under MiFID II, if the firm is unable to produce accurate records during a financial dispute, it will be seen to be at fault.

Challenge or opportunity?

Firms need a holistic view of compliance across all channels: it’s often the case that a conversation will carry on over the phone, via email or SMS and in person. They will need to demonstrate that the policies, procedures and management oversight of the MiFID II recording and monitoring rules are in place.

Remember that the Financial Ombudsman looks for evidence that the information or advice provided by the firm was ‘clear, fair and not misleading’, in the event of any dispute and in the absence of such evidence will likely rule in favour of the customer. Witness the PPI mis-selling debacle which has so far cost UK financial services businesses £30bn in compensation.

Many firms are concerned about the cost and complexity of meeting these mandates for recording business conversations. But it’s also potentially an opportunity for them to create competitive advantage. A good quality audio repository for all client engagement could also serve as a great source of insight into customer sentiment, trends and market information, particularly if records can be searched.

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