FSA proposes taping mobile phone ‘calls – but why?

29 March 2010

FSA is quite properly concerned with reducing potential insider dealing and market manipulation conducted from within the United Kingdom.

However, to that end it has just released CP10/07, “Taping: Removing the mobile phone exemption”.

Background
The MiFID Implementing Directive specifically allowed Member States to impose their own requirements on investment firms related to the recording of telephone conversations and other electronic communications relating to client orders. In March 2008, as part of its focus on combating market abuse, FSA published its policy on the recording of telephone conversations, to create a common standard and make mandatory requirements for Authorised Firms to capture and retain voice records.

This reflected the very high value FSA placed on contemporaneous telephone recordings as evidence of knowledge and/or intent in cases of suspected market abuse. However, largely as a result of both the perceived technology gap, and the fact that a number of Authorised Firms prohibited employees from taking orders on mobile ‘phones, mobiles were excluded from the new requirements.

FSA undertook to review that exemption after 18 months, synchronising with a legal requirement under the MiFID Implementing Directive that the European Commission produced a report by the end of December 2009 on whether the Member State discretion on taping remained appropriate.

Proposal
FSA’s proposal is simply to extend the current fixed-line taping obligations to require the recording and storage of all ‘relevant communications’ made with, sent from or received on mobile phones issued by firms for business purposes.

This will be buttressed by a rule requiring firms to take “reasonable steps” to ensure that such communications do not take place on private communication equipment.

Cost/benefit analysis
FSA’s analysis, partly based on a study they have commissioned from Europe Economics, concludes that industry costs will lie between £7mn and £11mn in implementation, and between £18mn and £21mn in ongoing annual costs.

The analysis further costs the retrieval of recorded conversations at £200 per call, for a stated anticipated annual cost of less than £100,000 across the industry.

Simple maths tells us that therefore FSA anticipates retrieving fewer than 500 mobile phone recordings per annum across the industry, which, even at the lower of the two ongoing annual costings, implies an industry cost of £36,000 per retrieved mobile phone conversation – a large proportion of which are likely to exonerate, rather than implicate, the participants.

The specific benefits are largely unquantifiable. FSA states its view that, if the current exemption is maintained, those wishing to circumvent the rules have incentives to move ‘relevant conversations’ on recorded fixed lines to unrecorded mobile phones – presumably as they have at present.

The expected economic benefits are:

“recorded communication increases the probability of successful enforcement; and
this reduces the expected value of exploiting private information and hence reduces insider trading.

This, in principle, leads to increased market confidence and greater price efficiency.”

FSA also states that, in the context of market abuse investigations, the new requirement is expected to produce additional contemporaneous evidence, and would generate an increase in the quality and volume of information available to enforcement in pursuing insider dealing and market abuse cases.

View from the real world
These proposals are awe-inspiring in terms of the artlessness that they imply on the part of the regulator, alongside its willingness to take up to £32mn out of the industry in the first year in new costs - in the midst of a recession - for, at best, an uncertain benefit and at worst one which is entirely illusory.

FSA is currently most interested in targeting the “professional” insider trader, as the conviction of Malcolm Calvert, indictment of Christian Littlewood, and the six further arrests on 22nd March tend to demonstrate. It has always been my experience, as a regulator and as a compliance head, that professionals who wish to break the rules for potential profit will not be deterred by rules and internal procedures, and will take active measures to avoid detection.

Further, as in the case of Calvert, the Courts are quite capable of reaching a guilty verdict based on circumstantial evidence. Itemised business mobile phone bills are already discoverable, as they belong to the Authorised Firm rather than the individual – so the fact of mobile phone calls being made at critical times already provides an evidential framework for further circumstantial conclusions.

When you can buy a SIM-free mobile phone for less than £40, and a pay-as-you-go SIM card for less than £4, evading the tapes will not be a problem for the even casually-determined professional. It isn’t a great leap to suppose that mandatory recording of business mobiles will merely reposition the incentive to move ‘relevant conversations’ from recorded mobile phones to unrecorded private throwaway mobile phones.

Final complications
The European Commission is already in breach of the MiFID Implementing Directive. The review of the appropriateness of Member State discretion around telephone taping will now, FSA tells us, be completed by December 2010 – rather than 2009 - as a part of the Commission’s nuts-and-bolts MiFID review.

Individual privacy issues are taken more seriously in parts of continental Europe than in the UK. It is entirely possible – and likely – that the Commission will both remove Member State discretion, and decide that recording of mobile phones does not form part of the harmonised EU requirements. The proposal now consulted upon by FSA, if enacted, would at that stage likely become unlawful under European law.

Why now?

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