Monitoring conduct in financial markets

Article

Monitoring conduct in financial markets: the impact of voice and electronic communications

Forensic Foresight: February 2017

Monitoring and surveillance programs in the financial services sector are coming under more intense scrutiny from regulators, who are increasingly finding current programs inadequate in the face of recent poor conduct in the industry. As organisations look to bolster their prevention, detection and monitoring capabilities, many are looking to emerging audio and electronic communications surveillance technologies to assist them in meeting regulatory expectations.

Overview

The spotlight is shining strongly on the conduct of financial services institutions and does not appear to be dimming any time soon. Locally three of the four big banks are facing civil proceedings for alleged unconscionable conduct and market manipulation1, and there have been numerous examples of insider trading scandals and general misconduct. Overseas, the foundations of the industry have been shaken by forex scandals, rogue trading, and allegations of collusion, including the jailing of former traders.

At the heart of these scandals have often been traders and employees who facilitate misconduct through the use of email, telephone and instant messaging platforms.

Expectations and requirements: Contrasting Australia with the world

Note: Deloitte Forensic staff are not lawyers and the summary below should not be relied upon as legal advice.

In Australia there is no express statutory requirement for financial institutions to monitor or record communications platforms, with the exception of audio recording for some derivative products2. However, increasing expectations of regulators suggest that monitoring of communications internally and externally should be conducted as a way of complying with obligations contained in the Corporations Act3 and APRA’s Prudential Standards.4

Overseas, the regulatory environment is starting to mandate that organisations surveil communications: as an example, the US has audio and electronic communication recording requirements for the OTC derivatives markets, and the UK for certain financial instruments5. Notably, the European Union has introduced the Markets in Financial Instruments Directive II (MiFID II) which requires the recording of telephone conversations and electronic communications; previously recording was discretionary6. The current deadline for compliance with the new requirements is January 2018.

Further, local and global industry regulators and groups have released guidance notes in respect of audio and electronic communications surveillance including:

  1. The AFMA Code of Conduct guidelines which strongly recommend that “verbal and electronic conversations between front office dealers/traders, brokers, advisers, and clients be recorded.”7
  2. ASIC, who have publically stated supervision efforts should be proportionate and conducted with appropriate frequency across all communication channels.8
  3. The Model Code issued by ACI9 that states recording telephone conversations in dealing rooms is normal practice and monitoring of chat-based platforms is considered best practice, if it is not already mandatory for an organisation.10
Critical program elements

The technology platforms available for audio surveillance and electronic communications monitoring has markedly improved over the recent years, allowing more effective monitoring of the conduct of employees. With experience in both designing surveillance programs and examining the data collected, we see the following as critical for an effective program:

 

  1. Development of individual trader profiles that are monitored and refined over time
  2. Electronic keyword or equivalent based searching for high volume voice-brokered trading
  3. Risk-based manual reviews of voice surveillance (e.g. listening to calls around key fixing windows)
  4. Investment and tailored implementation of surveillance technology solutions
  5. Algorithm based data surveillance to identify potential networks of activity
  6. Predictive coding data surveillance to identify unusual  patterns of activity
  7. Digitisation of voice communications enables the use of analytics
  8. Development and enforcement of lexicon policies
  9. Upgrading legacy systems and infrastructure
  10. Stronger oversight and governance of chat-based platform
Ensuring your program is effective

A formal surveillance and monitoring program is the first step to enhancing an organisation’s prevention, detection and monitoring capabilities. However, with many regulators finding that existing programs are ineffective, it is important to consider the following at each stage of the program’s lifecycle:

  • Source of intelligence, including external sources such as news feeds and social media
  • Length of audio calls and chat strings
  • Ability to extract data and present them in an appropriate format for review and potential investigation
  • Feed frequency between collection and upload to surveillance platform
  • Training, qualifications and prior experience of employees
  • Time zones, geographies and languages of the employees being monitored
  • Local laws, including data protection, privacy, and human rights, that may impact on the recording and transmission of conversations
  • Appropriate policies and procedures, including escalation, investigation of ‘red flag’ correspondence and policies on the use of communication outside of monitored platforms
  • Retention policies, data storage, ensuring that data is retained in accordance with legal requirements, and storing data indefinitely where there are legal proceedings and investigations
  • The role of risk and compliance functions.
How we can help

With experience in both designing programs and examining the audio and electronic communications data collected, we are well placed to assist you with:

  • Designing and implementing your surveillance and monitoring program
  • Education and training in respect of surveillance tools and technology
  • Collection, preservation and production of data
  • Sample based testing of surveillance data for quality assurance purposes
  • Conducting investigation, look backs and remediation programs in respect of conduct related issues utilising technology solutions.

 

End Notes

1. Notice of Filing and Hearing, Federal Court of Australia, Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited [VID197/2016], 4/03/2016
Notice of Filing and Hearing, Federal Court of Australia, Australian Securities and Investments Commission v National Australia Bank Limited,[ VID604/2016 ] 7/06/2016
Notice of Filing and Hearing, Federal Court of Australia, Australian Securities and Investments Commission v Westpac Banking Corporation ,[ VID282/2016] 5/04/2016
2.ASIC Market Integrity Rules (ASX 24 Market) 2010 (Cth) r2.2.7 and ASIC Market Integrity Rules (ASX Market) 2010 (Cth) r4.1.10.
3. Corporations Act 2001 (Cth), pts 7.6, 7.8, 7.10.
4. APRA, Prudential Standard CPS 220 (at January 2015).
5. Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub L No 111-203, 124 Stat 1376 (2010) and Financial Conduct Authority Handbook, Conduct Of Business 11.8
6. Markets in Financial Instruments Directive I (MiFID I).
7. AFMA Code of Conduct Guidelines, AFMA, November 2015, page 16.
8. Report 44: Financial benchmarks, ASIC, 8 July 2015, page 24.
9. ACI – The Financial Markets Association (ACI) is an “international non-profit, non-political association of wholesale financial market professionals” founded in 1955 and currently has over 13,000 members globally. (https://acifma.com/about-aci).
10. Model Code, ACI - The Financial Markets Association, February 2015, page 102

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