Liz Morrell looks at the state of play following changes to FSA regulations around mobile call recording, which came into effect in 2011

Since November 2011 it has been a mandatory requirement from the FSA for all calls to and from mobile phones to be recorded for anyone dealing with financial trades. The new requirement was designed to help to prevent insider trading in the finance industry by closing a loophole that existed whereby previously, although financial firms had to tape fixed line calls, the same legal requirement wasn’t in place for any calls made or received on a mobile phone. This was simply because when landline recording was introduced four years ago in March, it was felt that there wasn’t the technology available at the time to do the same for mobile phones. Yet experience of the last year or so shows that poor compliance to the requirement is still down to the fact that the technology wasn’t good enough on introduction.

The requirements specified that financial firms take “reasonable” steps to record any conversations that were made on a mobile that related to financial transactions such as those in the bond, derivatives, equities and financial commodities markets. “Introducing the new rules added an extra source of voice and electronic communication evidence, which can be used to help us counter the key priority of market abuse and increase the probability of successful enforcement,” says a spokesman for the FSA. “The new rules will also contribute to our wider effort to promote cleaner markets which should, in turn, enhance market confidence.”

Financial firms were then required to store those conversations for six months either on the handset or remotely. The change was expected to affect more than 16,000 financial firms although some experts say the reality was this was only estimated to target around 25,000 actual handsets. And yet according to a survey published late last year by FStech and TeleWare nearly a third of firms have not yet complied with the regulations. Neil Hammerton, CEO at Natterbox, believes around 60 per cent of the market is compliant at present. “That is a surprisingly low figure considering that the ruling was brought in 14 months ago.”

Lesley Hansen, global marketing director at TeleWare, says that part of the problem is a lack of action from the FSA. “So far the FSA hasn’t shown any teeth so financial organisations don’t have any feel for how important they think it is.”

Embroiled in its own high profile changes the FSA says it can’t yet say whether anyone is being investigated for non-compliance even though it is more than a year since the changes came into force. “We typically let firms bed in new systems before we take any action. We constantly supervise firms to check their systems and controls are adequate but we can’t say yet if, through our supervision, we are investigating any firms or if we will take action,” says its spokesman.

Worryingly the survey also showed that, of those that had complied, 53 per cent had done so simply by banning the use of mobile phones for business in the workplace. For Robert Simpson, vice president global financial compliance at Verint, this isn’t a satisfactory long-term solution. “We live in a multi-channel world and the financial trading floor is no exception. In a fast-moving industry like financial services, where huge sums have been invested in technology to reduce latency and increase the frequency of trading, banning a mainstream technology such as the mobile phone puts financial institutions at risk of throwing the baby out with the bath water.”

Harry McDermott, CEO at Hudson & Yorke, believes it is an even more fundamental problem than that. “It’s not a solution because the mobile workforce is critical to competitive advantage.”

Low compliance levels are perhaps hardly a surprising state of affairs, according to Steve Cobley, managing director at Retell. “It’s a costly exercise in many cases and very challenging as far as choosing the correct technology. There are also security implications i.e. some companies want the recording on site which is more cost-effective and perhaps more secure. Others have gone for hosted, off site, which is a monthly cost, on-going, but need to be assured that the site is secure.”

Tim Furmidge, head of product management at BT Unified Trading and BT Radianz, says a big stumbling block is the fact that it infringes on the user experience and therefore individuals can be resistant to its introduction. “Other than being compliant, there is no functional upside for the trader. Their mobile
device is often seen as a very personal thing and as such having it recorded is seen as more intrusive than their desk phone or dealer board.”

Immature technology
As mentioned earlier, a major factor for the lack of introduction was the fact that the technology just wasn’t up to the job “We have not had a major financial market around the globe deploying mandatory recording technology before and as such the technology was not mature technology that could simply be dropped in and work,” comments Rik Turner, senior analyst, financial services technology at Ovum.

“Banks complained that many of the companies offering these solutions were start-ups, with little or no track record. These companies were not always seen as reliable, and often lacked the resources to undertake major “big bang” implementations at large financial institutions. Providers were unable to scale up to meet demand across the industry, leading to waiting lists for implementations with the deadline approaching,” says Hudson & Yorke’s McDermott.

Natterbox’s Hammerton believes the problem was that the early solutions were application-based. “Upon the introduction of the ruling, most organisations opted for an app-based solution. However, this later proved to be both troublesome and time-consuming for IT departments due to the ability for end-users to circumvent the app, completely defeating the purpose of introducing the solution. It meant that financial institutions were left non-compliant and open to prosecution.”

There were also problems of connection times with delays whilst recording kicked in. “For financial organisations these problems could be catastrophic, for example with the potential to create missed opportunities in trading scenarios,” says Glyn Owen, portfolio manager at Damovo UK.

Simpson agrees that the technology didn’t have the smoothest of introductions but says that sight mustn’t be lost of the original goal. “That is to increase confidence in the integrity of the markets, that integrity is critical to the efficiency and transparency of financial markets.”

He adds: “The challenges that banks face in using this technology are significant, but far from insurmountable. The installation and support issues associated with any technology that is new to the vendor as well as the purchaser are slowly being overcome, particularly as the second generation solutions based on the mobile networks and fixed mobile convergence approaches are introduced.”

McDermott agrees that today’s SIM solutions are now more stable: “The industry has come a long way in 12 months and the new breed of solutions is much more effective. The recording is tied to the SIM card rather than an on-device app, removing the issues of handset compatibility and call setup delays.”

As a result many are now re-evaluating their solutions and Furmidge believes there are a number of reasons for this. “Some have deployed application-based solutions and the user push-back has been too high (thanks to long delays and failing calls which have been common) whilst others have deployed “voice only” solutions and now need to find something to cover SMS as well,” he says. For others he says it is simply the second phase of a pre-declared two-phase plan. “Phase-1 get Compliant; Phase-2 get Elegant.”
Turner says it is up to the mobile operators to step up to the plate and offer a SIM-based recording service that can be used universally. Vodafone is rumoured to be planning this.

Despite the lack of action so far from the FSA, the reality is there is no getting away from the need to comply in the long-term. “They are being naive if they thing it will go away. They are putting themselves at risk not only from litigation from the FSA but also the customer,” says TeleWare’s Hansen, who points out that, as with the recording of landline conversations, the recording of mobile interactions can also be used for improving training and as proof of conversations with customers.

And she notes that the increasing sophistication of the technology is also proving beneficial with the ability now for some to record and then email conversations. “The products have come a long way and are now a useful tool rather than just being FSA compliant.”

Whether the financial organisations agree will become evident over the next few months.

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