FCA REMOVES DOMESTIC EXEMPTIONS UNDER THE TAPING REGIME AND PROVIDES MUCH NEEDED CLARITY FOR MARKET PARTICIPANTS

20 July 2017

Yesterday, the FCA published their final Policy Statement (“PS”) on the implementation of the Markets in Financial Instruments Directive II (“MiFID II”).

 

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Setting out their final rules ahead of January 3rd, 2018 the FCA has had to delicately balance the benefits to consumers and to the integrity of the UK market versus the incremental cost increase for firms of adopting the new rules. With the FCA firmly focussed on enhancing consumer protection and market integrity their message to the market is clear;

 

‘...Put the interests of clients at the heart of what you do....

 

In exercising discretion to enhance consumer protections the FCA have stated that an effective governance structure and the right culture are crucial to a successful MiFID II implementation.

 

One such area the FCA has exercised discretion is related to the significant extension to the domestic taping regime which has been in place since 2009. This is listed (and stated) in the PS as a ‘...new policy choice...’.

 

Under the, now extended taping regime, MiFID II introduces a new requirement on firms to ‘...record telephone conversations and electronic communications relating to (or intended to relate to) transactions concluded when dealing on own account and when providing client order services that relate to the reception, transmission and execution of orders...’

 

The PS provides much needed clarity for corporate finance businesses, discretionary investment managers and energy market and oil market participants, amongst others by mandating they adopt the new rules albeit with some dilution.

 

In deliberating, over whether to continue the current exemptions the FCA weighed up industry feedback concerned that adoption of the new requirements would ‘...slow down corporate decisions...’ , ‘...make the UK’s capital markets a less attractive route to raise finance...’ , ‘...result in significant data costs...’ and have a ‘...disproportionate effect...’ on the basis the ‘...removal of the exemption was not sufficiently justified...’.

 

However, the FCA take a steadfast approach by mandating that firms must record conversations and electronic communications that are in scope of Article 16 (7) and further provide clarity (specifically for corporate finance services) that the recording requirement is ‘...on the end of the process leading to a transaction where the transaction is agreed or there is a reasonable prospect of the transaction being agreed...’.

 

Need to ensure communication compliance?

 

For Discretionary Investment Managers, the decision to remove the exemption under COBS 11.8 was clear and based on the FCAs ‘...supervisory and enforcement experiences...’ when attempting to rely on sell-side only records provided by those not directly subject to investigative procedures who often end up shouldering the financial, as well as administrative, burden on behalf of their clients. The FCA remarked ‘...we are confirming the original proposal to remove the qualified exemption available for discretionary investment managers...’.

 

One poignant closing remark in the Taping section of the PS is that the FCA would simply;

 

‘...regard it as good practice for firms to tape as a means of maintaining effective records...’.

 

Oliver Blower, VoxSmart CEO

 

 

 

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