MiFID II & FinVermV: Importance and effects
The objective of the Financial market directive MiFID II and the Financial Investment Mediation is to increase security in the market, to create transparency and thus to offer customers comprehensive protection. However, there are also regulatory requirements regarding the obligation to record, document, store and notify telephone and electronic customer communication.
MiFID II
The second financial market amendment regulation (MiFID II) which implements the European Markets in Financial Instruments Directive in German law has already been in force for more than a year. The directive provides the regulatory framework for investment services in Europe and affects the functioning of European financial markets. It defines the rules that banks and asset managers have to obey for investment transactions with private customers.
MiFID II has tightened the regulations of MiFID I and added new rules that had not been defined previously. The aim was above all to strengthen investor protection and to increase the transparency of the financial markets. In Germany, compliance with the directive is monitored by the Federal Financial Supervisory Authority (BaFin). Infringements are punished with heavy fines of up to five million € and/or trade bans.
MiFID II comprises about 7,000 pages – the corresponding set of regulations as many as 20,000 pages. These pages include a regulation which is just three quarters of a page short, but which has a tremendous impact on daily banking business: it is about so-called taping. The exact requirements are as follows:
Recording:
Banks, liability umbrella and asset managers with a BaFin license according to § 32 of the German Banking Act (KWG) are required according to MiFID II art. 16 para. 7 (Taping) to keep records of phone or video consultations as well as of any related electronic communications in an in a tamper-proof manner:
- All consultation calls made by means of phone, chat, video telephony, co-browsing, etc.
- Calls which lead to a transaction or to a customer order
- Changing and cancelling orders
- Consultation calls where a transaction is intended to take place
- Calls within the investment firm if they are connected to consultation
Documentation and retention obligation:
The recordings must be kept for five years. The period begins with the creation of the recording. Upon request of the supervisory authority, this period can be extended to seven years. During this time, it must be possible to find the recording quickly if requested by BaFin. It must be ensured that the archived calls cannot be manipulated or deleted. Furthermore, any manipulation must be traceable.
- Recordings in a format that makes changes impossible
- Storage on permanent media
- Export upon customer request e. g. as WAV or text
Notification obligation:
Customers must be informed that their communication is recorded. Furthermore, it must be pointed out to customers that they can request a copy of their recorded call within the retention period. If customers object to being recorded, no advice may be provided when relating to the acceptance, transmission and execution of customer orders.
- §201 para.1 StGB: Unauthorized recording of private conversations of other persons will be prosecuted.
- §4 para.1 BDSG: Permission by other legislation
- Permission according to § 28 BDSG by consent according to §4a BDSG in written form or under special circumstances by verbal/implicit consent e. g. keystroke/phone announcement
FinVermV
The amended ordinance for financial investment brokers was adopted by the Federal Council on 20th September 2019. It obliges financial investment brokers with a license according to section 34f of German Trade Regulation Act (GewO), so-called 34f agents, as well as fee-based financial investment advisors with a license according to section 34h GewO, to record and store their phone calls in compliance with the law from 1st August 2020.
As with MiFID II, section 18a of amended FinVermV also requires that mediation and consultant calls by phone and other electronic communications be recorded and stored. However, FinVermV stipulated that the records must be archived for ten years. This is meant to detect fraudulent behavior among financial service providers or to prevent it in the first place. For example, it must be documented whether and how customers have been informed about the chances and risks of the recommended transaction and about the properties of the recommended financial instruments.
The recordings serve as valid evidence - for the supervisory authority as well as in litigations with customers who can request to be provided with the recording. And customers must be informed in advance that (electronic) communications will be recorded to be available for ten years. In addition, § 18 para. 5 FinVermV stipulates recordings to be stored in such a way that they can neither be manipulated nor deleted.
Freelance financial investment brokers work much more flexibly than asset managers, for example. Consultations often take place face-to-face or by using private landline phone connections or the mobile phone. Moreover, financial investment brokers tend to have a heterogenic multi-channel approach to communication much more than banks do, for instance. This makes legally compliant recording more difficult to ensure which is why financial investment brokers depend on a partner who can provide them with a solution for FinVermV-compliant recording across all deployed channels.
Recording solution for MiFID II and FinVermV – an overview of the requirements
A recording solution that is in compliance with MiFID II and FinVermV must meet the following requirements:
- Legally compliant recording
- Omni-channel recording (voice, screen, video, chat)
- Recording of calls on demand or automatically
- Audit-proof data storage
- Protection against manipulations of recordings
- Tamper-proof storage for five years (up to seven years) according to MiFID II and for a minimum of ten years according to FinVermV
- Short-term provision of the recordings for customers and authorities upon request
- Easy search and availability as well as effortless mapping of recordings from the agents’ premises
- Traceability of manipulations in case existing security measures have somehow been evaded
- Easy retrieval as well as effortless mapping of recordings from the agents’ premises
- Information about the recording (manual or automatic)
- Compliance with GDPR: multi-tenant capability, user rights, logical separation of the database for cloud solutions, encryption etc.
Taping: Bureaucratic nightmare or opportunity?
The obligation to record calls is probably the most controversially discussed amendment of FinVermV. Increased administrative and financial costs are expected. After all, new guidelines and processes always tend to entail additional work for the affected companies. Eventually, such new laws and directives serve a higher purpose – in the case of FinVermV and MiFID II first and foremost consumer protection.
But despite additional effort and expenses, taping also offers opportunities. Affected agents can use the amended FinVermV to streamline their processes and modernize their structures. And it gives them the opportunity to shine a light on their quality and transparency. Recorded calls can easily be made available to customers and at the same time serve to protect agents against litigations.
Adequate recording solutions are able to transcribe the calls (in whatever form) and create protocols that can be sent to customers to be signed and returned once the call is over. This is reflected by reduced post-processing times as manual documentation becomes redundant. Furthermore, the recorded data serves as an excellent basis for subsequent analysis which can then be used for compliance management, risk management, fraud detection, training purposes or quality management.
And last not least: Companies must not give in to restricting or even prohibiting digital-media communication because of such directives. In times like these, this would be a massive step backwards and might very well entail negative economic consequences for the company in the medium term. Regardless of what you think about taping: Taping will soon be a reality. By 1st August 2020, financial investment brokers must have implemented the requirements of FinVermV. It is therefore imperative to give this topic the attention it deserves before long.
Notes of the author: The information contained in this article is by no means comprehensive and does not constitute legal advice.
