_On 20 March the European Securities and Markets Authority (“ESMA”) issued a public statement to clarify issues regarding the application by credit institutions and investment firms (referred to as "firms") of the MiFID II requirements on the recording of telephone conversations while BCP plans have been invoked in response to the COVID-19 pandemic.
MiFID II requires mandatory records to be kept by firms including, amongst other things, recording of telephone conversations relating to transactions concluded when dealing on own account and the provision of client order services that relate to the reception, transmission and execution of orders.
The social distancing required to combat COVID-19 is an exceptional challenge in that traditional BCP back-up sites and systems cannot be relied upon. As such, while many firms’ policies have considered the MiFID II requirements in their development of BCP policies and responses, these may be challenged by the fact that all employees have been forced to work from home and back-up sites with hard lines and call recording have been rendered useless.
In drafting its rules and Q&A’s ESMA recognises the use of mobile telephones in the provision of MiFID services, and has previously stated that:
“a firm shall take all reasonable steps to prevent a relevant person from making, sending or receiving relevant telephone conversations and electronic communications on devices which the firm is unable to record or copy.
Firms are required to establish, implement and maintain an effective recording of telephone conversations and electronic communications policy. This policy should therefore cover the requirements relating to mobile devices.”
ESMA understands that mobile recording is not always possible and therefore, where mobile devices cannot be recorded, it expects that the regulatory requirements are met by using alternate recordable electronic communications (rather than telephone conversations).
Given the sudden nature of the COVID-19 outbreak and the immediate move to a prolonged and wide-ranging BCP that relies on home working rather than back-up sites, ESMA recognises that firms may have taken reasonable steps but still may not be able to record voice communications due to the exceptional circumstances. Where this is the case, ESMA will permit alternative steps to mitigate the risks posed by the lack of recording, such as “the use of written minutes or notes of telephone conversations when providing services to clients, subject to prior information being provided to the client of the impossibility to record the call and that written minutes or notes of the call will be taken instead.”
Where this relief is relied upon, ESMA expects firms to ensure enhanced monitoring and ex-post review of relevant orders and transactions; they should also consider how to incorporate these non-standard records within their mandatory record keeping systems. Furthermore, firms should consider the wider legal risks arising from instructions being transmitted without call recording, such as legal disputes that may arise; accurate written client confirmations, including the minutes, are important in mitigating such risks.
Finally, while the business disruption caused by COVID-19 could be prolonged, ESMA expects firms to deploy all possible efforts to ensure that the above measures remain temporary and that recording of telephone conversations is restored as soon as possible.