Veritape Views

Following consultation in 2007, the Financial Services Authority has now mandated call recording across many regulated financial sectors. This requirement comes into force on 06 March 2009.

However, the FSA has made a number of key concessions and changes the since its initial proposals, and these reduce significantly the impact the new rules will have. In making these concessions, it appears that the FSA bowed to industry pressure rather than considering its primary role as a market regulator. And further, the FSA has ignored key technologies in the call recording market which could have resolved some of the industry’s concerns.

The background

In May 2007, The FSA’s Consultation Paper CP07/9 (Conduct of Business regime: non-MiFID deferred matters (including proposals for Telephone Recording)) first set out the FSA proposals for requiring call recording across “traded” areas of the financial markets such as equities, bonds, financial commodities and derivatives. Conversations by dealers and traders would be recorded, and firms such as stockbrokers, investment banks, hedge funds and insurance companies would be affected. The broad intention was quite clear at the outset:

The prevention, detection and deterrence of market abuse is a key priority for the FSA. Good quality recordings of voice conversations and of electronic communications assist firms and the FSA in the detection of inappropriate behaviour, and in its investigation and punishment. Importantly, the knowledge that such behaviour can be detected and may be punished acts as a deterrent to individuals who might be tempted to act inappropriately. (CP07/9, 19.1)

The FSA proposed that recorded calls should be kept for a minimum of 3 years, and that the recorded calls “be kept in such a way that they are accessible for future reference” (CP 07/9, 19.8). A detailed cost-benefit analysis was undertaken, to show that mandating call recording was a cost that the industry should bear, in order to reap the benefits foreseen by the FSA. The benefits included ‘cleaner’, more efficient markets, reduced cost of equity and increased market confidence.

The consultation - general industry feedback

Feedback from industry was sought, and the FSA published a summary in its Policy Statement PS07/18 (Conduct of Business Regime), in October 2007. The main concerns expressed by the financial services industry were:

• the FSA’s estimate of how much call recording existed already within the targeted sectors was too low,
• the FSA’s cost estimates were far too low,
• significant resources would have to be expended to find calls requested by the FSA, and
• the proposed retention period of 3 years was too long.

The rules, implemented

The final rules on call recording were published in March 2008, in the FSA’s Policy Statement PS08/1 (Telephone Recording: recording of voice conversations and electronic communications).

Far from sticking to its guns about a 3-year call retention period, the FSA has reduced retention to just 6 months. It is clear that this decision was influenced by the feedback from the financial services industry, on the grounds that the perceived cost of storage, and the difficulty of finding calls after a long period (or even a short one) would make 3 years unworkable.

However, there is one very obvious reason why this is a bad idea: the loss of calls which may otherwise aid the FSA’s investigative role. This should override the industry’s concerns.

In addition, as detailed below, the concern about the difficulty of finding calls after a long period is not a problem at all.

The 3-year call retention period

In PS07/18, the FSA took the chance to rebut industry concerns about the 3-year retention period, stating good reasons why it was necessary:

Because of the way in which enforcement cases evolve we have in some cases requested tapes over two years after the relevant incident that is the focus of our attention. (PS07/18, 19.10)

In addition, the FSA clearly spelled out to the industry some of the ways in which call recording had helped the industry in the past. The case study provided by the FSA (Splits) is a compelling argument, and one key point jumps out. The investigation commenced in October 2002, and a compensation payout of £200 million was made by most firms in December 2004. However:

Three of the firms had, by the time of the investigation, destroyed any tape recordings which had been made. (PS 07/18, 19.29)

It is not alleged by the FSA that these firms deliberately destroyed the recordings in order to conceal anything. Rather, it is clear that an increased retention time would have aided in the investigation.

In its final rule-making Policy Statement, the FSA itself admits that calls may be lost under the 6-month retention period:

However, there may be some loss in evidence in complex cases where abusive firms or individuals are identified late in the process, and requests for information cannot be made within six months. (PS 08/1, 2.64)

It appears that the FSA has bowed to pressure from the financial services industry, rather than remain true to its role as a market regulator, and has compromised the abilities of its own Enforcement division.

The call retrieval ‘problem’

A complaint from respondents to CP 07/9 (published in PS 07/18) was that:

significant staff resources could be involved in searching tapes where, for example, requests were made to have all conversations with a specific client (PS 07/18, 19.4)

This was further highlighted in PS 08/1, which stated (emphasis added):

One authorised firm was concerned that whilst recording is possible, retrieval is a big issue, especially given the large number of minutes that would be recorded under the FSA proposals. A typical retrieval for the firm takes seven working days; they currently receive about six such requests each year. The firm further stated that the Data Protection Act adds another layer of difficulty since the party listening to tapes must be totally independent of those involved and thus will not recognise (or be able to distinguish between) voices on recordings. The company may need to employ more people to search through tape recordings if the volume of requests were to rise once the coverage of taping was increased. (PS 08/1, A1.49)

This, unfortunately, is a problem for any company which continues to use a traditional hardware-based recording system. Systems of this kind were considered by the FSA and its consultant Europe Economics as part of their analysis of the call recording industry.

All call recording systems store data relating to each call. However, as Europe Economics points out, these are typically very limited. The 2 sample systems considered by Europe Economics had the ability to store the following “meta-tags”:

Solution 1: Date, time, extension number, channel number. Optional data dependant on where the system is connected: trader ID, Handset number, speaker information, private wire details
Solution 2: Date and time of call, number of caller, number called to, Call duration
(PS 08/1, Annex 3, Table 3.1)

However, when conducting an investigation, the FSA will ask for calls to be retrieved which relate to particular customers, accounts or individual trades. None of this information is stored with the call. No wonder, then, that financial services firms using this sort of technology cannot locate calls quickly, and it can take more than a week to do so. In fact, in most cases they have to listen to many hundreds of calls just to find the right one, giving rise to the above concern about the Data Protection Act.

There is an easy solution: store additional data with each call. Store the trade ID, store the customer’s unique account details, store a database reference - whatever is needed to ensure easy and quick retrieval of calls. Broadly, this process is known as “call tagging“, and it helps to locate calls instantly in the future.

Call tagging not only allows instantaneous location of a call or group of calls, it also ensures that other, unrelated, calls do not need to be listened to. This eliminates any concerns about Data Protection Act breaches.

If the FSA had more fully considered the current technologies available, it would have been able to assuage industry fears of added complexity or difficulty with extended call retention. In addition, it could have actively encouraged the tagging of calls with business-relevant data, to help improve the operations of financial services firms.

The “we can’t find the recording” ‘problem’

The same firm quoted above also told the FSA’s consultants that it couldn’t identify which of its staff was being recorded during a conversation (emphasis added):

The firm stated that one difficulty with the available technology is that if a phone call is made to employee A (who is away from his desk) and hence the call is forwarded to employee B, the call is recorded on employee A’s line. Therefore, if the FSA were to have concerns about the activity of employee B and searched the recordings made on employee B’s line, they would not find a relevant and potentially incriminating conversation. The company is greatly concerned that in such a situation, where someone remembered having a conversation with employee B and hence a request for the conversation was made by the FSA, the company would be guilty by implication if the conversation could not be found. (PS 08/1, Annex 3, A1.50)

The problem here is not uncommon, and lies with the outdated method of call recording being used. Calls at this firm are being recorded centrally, by a hardware box attached to the company’s phone system. Each telephone line is recorded, but it is impossible to determine which employee is being recorded. The same problem happens outside the regulated financial services sector, in call centres. Staff regularly hot-desk, and so recording a given telephone line or extension gives no clue as to the staff member being recorded at any particular time.

The solution, again, is simple. A flexible software system which records calls locally at the staff member’s PC captures the precise details of the staff member logged into the PC. Calls can then be retrieved instantly at any point in the future, simply by searching by the person’s name. (For some telephone switches, users are required to ‘log in’ before using the phone, and some hardware call recording systems will capture this information.)

Again, had the FSA and its consultants understood the nature of the more flexible software-based call recording solutions, industry fears such as those above would have had no bearing on the outcome of its consultation and ultimate decision-making process.

Summary

The FSA has decided on a 6-month call retention period which undoubtedly harms its ability to conduct investigations. It appears that the decision to back away from a more comprehensive 3-year period was partly driven by industry concerns about the inability to successfully and cost-effectively locate calls. Had the FSA and its consultants been more aware of current call recording technology, many of these concerns would have been rendered irrelevant. Thus the FSA would not have had to compromise at the expense of its own investigative processes.

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