Earlier this month we published a briefing following the Financial Conduct Authority's (FCA) statement on Covid-19 preparedness. We noted that, in seeking to address Covid-19 risk, a firm would need to ask whether it would still be able to discharge its duty to record or copy telephone and electronic communications of staff working remotely, noting the need for consistency with its policy on the use of privately owned equipment. We also noted the difficulty for the FCA in giving relief from rules derived from EU law, such as the rules on telephone and electronic communication recording, which have their basis in MiFID II.
Fortunately, the European Securities and Markets Authority (ESMA) has now issued a statement saying that it recognises that “considering the exceptional circumstances created by the COVID-19 outbreak, some scenarios may emerge where the recording of relevant conversations may not be practicable.”
The statement is not comprehensive in setting out the circumstances in which it “may not be practicable” to comply with the recording rules. It does, however, set out a framework for helping firms address the challenge of complying with its duty to record or copy telephone and electronic communications whilst staff work remotely.
The statement is clearly applicable going forward. However it is also relevant in assessing the extent to which firms may be considered to have taken sufficient steps, and whether members of the firm’s governing body (individually and collectively) have acted reasonably in seeking to comply with the recording rule thus far.
Key points for firms in the ESMA statement
- There needs to be an “exceptional scenario”, which includes a significant number of staff working from home suddenly or clients being unable to access e-mail. It is difficult to see how the circumstances in which a firm finds itself having to follow government advice on remote working and discharge its legal duty of care to protect employees would not qualify as an “exceptional scenario” as envisaged in the statement.
- A firm must be “unable to record voice communications”. This will be a question of fact with firms needing to show that it is unable to install recording equipment at a member of staff’s remote location to record conversations on “personally owned” devices, without breaching its legal duty of care to employees.
- The firm must be able to demonstrate that it has considered and, where possible, taken “alternative steps” to “mitigate the risks related to the lack of recording”. The statement identifies the use of written minutes or notes of telephone conversations when providing services to clients as an example of a mitigating step, subject to prior notification to the client. Analogous steps would include e-mail confirmations of transactions concluded by telephone copying those in the firm charged with monitoring transactions.
- Where a firm takes alternative steps, it will need to ensure that it undertakes “enhanced monitoring and ex-post review of relevant orders and transactions”. The statement does not expand on this but the firm would likely need to demonstrate that it had in place an appropriate process for reviewing orders and transactions that would otherwise have been subject to the recording obligation.
- As ever, a clear documentation of the reasons for the board’s decision to take alternative steps, noting the factors above where possible, will be vital in justifying any departure from the recording rules. As will clear documentation of the ongoing assessment of the situation and review of ongoing adequacy of any enhanced monitoring.
- A firm will still have to consider and take reasonable steps to ensure its compliance with related requirements, such as confidentiality of client information and management of conflicts of interest. The statement does not offer direct relief from other requirements although the points noted in the statement are useful in a firm’s consideration of what constitutes reasonable steps in complying with regulatory rules in the face of Covid-19.
The outbreak of COVID-19 (Coronavirus) and its global spread has created significant immediate challenges to societies, economies and to financial institutions.