Few anticipated Europe’s largest set of financial rules to be a walk in the park – even after the one-year delay that many had hoped would give market participants time to get their compliance requirements in order. Several months in, however, and many are still struggling: recent research by communications specialists TeleWare suggests that 40% of firms do not have adequate processes in place to comply with Article 16 of the directive, which requires all communication linked to trade to be captured and stored for up to five years. How is this possible?
Article 16, on the face of it, seems relatively straightforward: record everything. Anything related to a transaction when dealing on own account or in the provision of a client order – at any stage of the order execution process – must be recorded. To be clear: firms are required to record all telephone conversations and electronic communications, and retain them should their supervisory body come looking for instances of market abuse. Further, market participants must be able to demonstrate that they have adequate policies and procedures in place to minimise the risk of poor trading practices. By that – read monitoring communications.
And the fintech arena has obliged. A large number of incumbents have rolled out Article 16-specific Mifid II compliant call recording software, and a list of new firms have sprung up offering the latest in recording technology solutions – including VoIP, mobile and more standard fares. Many offer off-the-shelf products, while others offer bespoke system builds, involving speech-to-text functionality and storage solutions such as keyword spotting and trend identification. While implementation of the systems shouldn’t be cumbersome, and even the UK’s FCA has suggested costs shouldn’t be prohibitive, it’s clear that many market participants still haven’t gone to fintechs to assist with the requirements.
“We’ve outsourced the recording functionality, and while the volume of data should start to add up, we’re using a cloud provider so keeping hold of it shouldn’t be a problem,” says the head of compliance at a European bank. “We started exploring the market as soon as Esma made it clear this was going to be an obligation.”
Without doubt, Mifid II has put a great deal of strain on compliance and tech departments, but it’s alarming that 40% of the market has failed to comply with the standards set by regulators around call and electronic communication recording.
Mifid II was designed to create more transparent markets – and those in compliance with the directive are starting to recognise that value can be pulled from its onerous requirements. Where communication monitoring is concerned, that should lead to better insights on trade execution, delivery, and client relations. Conversely, those investment firms who have not either built their own or entered the fintech market for the appropriate tools face mounting problems – from fines, to the impossible task of back reporting, and ultimately the deterioration of competitive advantage.