UK's financial traders to record phone calls, emails from next month

The new rules, laid down by City regulator the Financial Services Authority (FSA), will come into effect on 6 March.

The change is designed to deter traders from abusing the market or behaving fraudulently, as well as to catch those who do. Trade bodies have resisted the move, though, arguing that the action is disproportionate to the harm done.

The FSA has decided that recordings of phone conversations and records of electronic communication must be kept by any firm which receives, executes or arranges client orders in the fields of equities, bonds or derivatives. Electronic communications which must be stored will include emails, faxes and Instant Messaging exchanges.

"Preventing, detecting and deterring market abuse is one of our key priorities," said an FSA explanation of its policy. "However, market abuse is one of the most difficult offences to investigate and prosecute. Good quality recordings of voice conversations and of electronic communications help firms and us detect and deter inappropriate behaviour."

"Introducing a taping requirement may raise the standard of behaviour by those using telephone lines and means of electronic communication which will be taped for the first time. It may also increase the quality and volume of information available in pursuing market abuse cases," it said.

The cost of the regulations will be borne by firms, though, and trade bodies have expressed reservations about whether the activity is worth the expense.

"There is a real concern that the proposals could have a detrimental impact on the international competitiveness of UK financial services," said John Salmon, a specialist in financial services law at Pinsent Masons, the law firm behind OUT-LAW.COM. "No other major market currently imposes such a regime and  recording requirements could cause many firms in the UK to fall foul of privacy laws in other countries. Firms that prefer a lighter regulatory touch could simply pack up and exit the UK market."

The regulations do not cover calls made with mobile or handheld devices, which may offer anyone aiming at avoiding recordings a loophole.

"The FSA has stated that firms will have to record relevant mobile phone conversations or 'change working practices' which, presumably, means banning staff from using mobile phones," said Salmon. "In the context of current business practice, however, such a ban would be disproportionate and could put the UK financial services industry at a competitive disadvantage."

Salmon also said that the cost of storage and retrieval will be high and he warned that the massive databases of calls and emails could have implications for firms in the light of other laws which apply to data gathering and storage.

"The retention of voice recordings for longer periods could have significant collateral consequences for firms, particularly in relation to data protection," he said. "An individual may request that a firm provide them with transcripts of all calls of which they are the subject. Searching and retrieving information, as well as redacting information that the firm cannot disclose, carry heavy cost implications."

Salmon also warned that organisations need to examine carefully any existing outsourcing arrangements. "If a call centre deals with your trades, the same obligations will have to be passed on to your provider – and that could change significantly the cost of your outsourcing contract."