Audio governance and COBS 11.8 - what does it actually mean and how do firms comply?

Overview of COBS 11.8

The UK Financial Services Authority (FSA) Conduct of Business (COBS) 11.8 is one of the latest regulations imposed on information environments for many financial services organisations.

Taking effect March 2009, this regulation requires covered entities to record certain telephonic communications and retain these recordings for a period of at least six months. It also covers a broad set of additional electronic communication, which at first glace may not appear as onerous, but presents firms with a need to manage across information channels.

Prior to this specific regulation, many firms had recorded phone calls or retained other electronic communication for use in potential disputes over orders and trades (along with quality or investigatory purposes). Realising the potential value in recorded information for enforcement and other activities, the FSA mandated that calls be taped and electronic communications retained.

Intent and purpose

As with any law or regulation, the underlying rationale for its development serves as a guide for how it might be used. With respect to COBS 11.8, the FSA in its policy statement1 made repeated references to the efficacy of taped information as evidence. It specifically noted: "recorded communication may increase the probability of successful enforcement."2

The policy statement went on to note, "crucially, the evidence that might be obtained from taped recordings may not be available by other means ... The advantage of telephone evidence over documentary evidence/oral testimony is that telephone evidence more often helps to show 'knowledge' and 'intent'." While the FSA's policy statement does make additional reference to the value of COBS 11.8 in the context of greater market confidence and price efficiency, it is clear that the FSA intends to use this information as evidence in enforcement actions.

Covered electronic communication channels

The FSA was careful in promulgating the final rule to avoid narrowly defining the types of electronic communication that were covered. In addition to telephone recordings of covered activities, the rule also covers "communications made by way of facsimile, e-mail and instant message devices."3 Calls made from mobile devices are specifically excluded from the taping requirement,4 although e-mail sent from such devices are still subject to the rule.5

As drafted, the rule covers the most common channels for communicating between firms and with their clients. However, the FSA was also careful to note that the rule should be read broadly, realising technological innovation often outpaces regulation. In its policy statement, the FSA stated electronic communication "is not limited to these, (the channels noted above), as it captures any electronic communications involving receiving client orders and the agreeing and arranging transactions."6

Entities and transactions that are covered

The application of COBS 11.8 "applies only with respect to a firm's activities carried on from an establishment maintained by the firm in the UK." As discussed in more detail below, cross-border and cross-jurisdiction issues arise where one party to a conversation or communication is outside the UK. Entities in the US working with UK affiliates or third parties should be particularly aware that calls will be recorded.

The scope of COBS 11.8 is focused primarily on the types of activities in which a firm or its personnel engage, as opposed to specific definitions of covered entities. The rule applies to a firm7:

- receiving, executing or arranging the execution of client orders;

- carrying out transactions on behalf of the firm (proprietary trading); and

- executing or placing orders on behalf of a client (discretionary trading).

It is important to note that a final transaction or trade is not required for application of the rule and associated taping or retention. Rather, conversations or communication "intended to lead to the conclusion of an agreement"8 are sufficient and covered by COBS 11.8. General conversations about market conditions, corporate finance and treasury functions and activities by service providers are exempted from COBS 11.8.9

Access and management of recorded and retained communication

The draft version of COBS 11.8 originally proposed a three-year retention period for taped conversations and electronic communication.10 However, the inclusion of audio recording in this requirement imposes a higher burden for multiyear retention than other communication channels, leading the FSA to impose a six-month retention period.11

Retention alone is not sufficient to satisfy requirements under 11.8. The FSA allows storage of conversations and communication in any form, as long as it can be: (1) readily accessed by the FSA; (2) changes or alterations are easily ascertained; and (3) it must not be possible for records to otherwise be altered or manipulated.12 The FSA went on to note it would "expect that firms' search facilities support a reasonable interpretation of 'readily accessible'."

Deploying a solution

Meaning Based Computing and compliance

In drafting COBS 11.8, the FSA realised that financial services organisations often employ several different communication channels to operate their business. The same types of transactions may be executed across different channels, depending on the client, employee, instrument or other factors. Audio content in particular poses unique technical and operational challenges, and will often need to be aligned with additional channels during an investigation or enforcement action.

While firms may find point technologies that can record or store information, they should focus heavily on the FSA's expectation that all content, including audio, be readily accessible. As such, firms should deploy single-platform solutions that can not only store data, but can record, analyse, archive and access information across a multitude of formats and channels. Audio should be managed and searched alongside and in the same manner as other mission-critical files, documents and e-mail. Only solutions leveraging Meaning Based Computing technology that can manage and search all types of enterprise information and interactions based on an understanding of their content can sufficiently support COBS 11.8 requirements.

Legal and supervision implications

Although COBS 11.8 only imposes an affirmative duty to record for firms operating in the UK, companies operating abroad, especially in the US, should consider the implications of this regulation. All types of electronically stored information are subject to discovery under the US Federal Rules of Civil Procedure.

US courts have broadly interpreted their powers to require discovery of relevant information, even if information is held by affiliates (or potentially third parties) in a foreign jurisdiction. This means that firms operating in the US and UK should have the ability to quickly apply a legal hold on all types of content, including audio. Additionally, a firm's access and search technologies should allow it to aggregate and analyse audio and other information together to determine whether any potential compliance issues are present.

Finally, COBS 11.8 does not impose an affirmative duty to supervise or proactively review audio recording or other communication subject to the rule. Knowing that the FSA fully intends to use audio recordings and other communication in enforcement action, it seems reasonable to suggest that firms implement a corresponding supervision programme for these channels.

Conclusion

The FSA's COBS 11.8 requires that firms record telephone conversations and retain other types of electronic communication. In its guidance, the FSA makes clear that audio content brings unique context and value as evidence in enforcement actions. Firms subject to COBS 11.8 must have the ability not only to retain audio and other electronic communication but, more importantly, provide ready access. Meaning Based Computing provides the means to manage and access information across communication channels, which is necessary where such complex legal and cross-jurisdiction obligations exist.

1. FSA policy statement 08/1, Telephone recording: Recording of voice conversations and electronic communications. www.fsa.gov.uk/pubs/policy/ps08_01.pdf

2. Ibid. at 2.1

3. COBS 11.8.7 G. www.fsa.gov.uk/pubs/hb-releases/rel87/rel87cobs.pdf

4. COBS 11.8.6 R (1)

5. Ibid.

6. See supra note 1. at 2.34

7. COBS 11.8.9 G (1)

8. COBS 11.8.9 G (1)

9. COBS 11.8.2 and 11.8.3 R

10. See supra note 1. at 1.3

11. COBS 11.8.10 R (1)

12. COBS 11.8.10 R (2)(a-c).

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