At the beginning of 2018, BaFin, as the competent supervisory authority for Germany, reviewed how the new requirements were implemented. The recordings of telephone conversations that BaFin had requested samples of showed that some clients were clearly uncomfortable with the fact that their conversations were being recorded. Reactions ranged from humorous remarks, such as “Best regards to the supervisory authority”, to pronounced criticism. But both clients and institutions are gradually becoming aware of the benefits that the new documentation requirements have to offer.

An eventful history

However, a number of questions need to be examined first: What does taping actually involve? What and how much has to be recorded? And what were the legislators´ objectives?

To answer these questions, we need to briefly delve into the eventful history of capital markets and consumer protection. Since the onset of the global financial crisis in 2008/2009, multiple scandals in which a large number of investors lost their savings have come to light. Whether the investments were conservative real estate funds dragged into the crisis by market developments or the infamous Lehman certificates, both the press and the civil courts often focused on the advice investors had received on these financial instruments. But in most cases, it was one person’s word against another’s. While the clients stated they had not been informed of the risks associated with the securities, the investment firms stated the opposite. Unless one party had compelling evidence, these uncertainties often worked to the disadvantage of the investors that had taken the investment firms to court.

In order to strengthen the position of consumers, legislators developed documentation requirements that entered into force at the start of 2010. Since then, the content of investment consultations has had to be documented in written minutes. Over a period of seven years, the investment advice minutes became an integral part of investment advice. Still, this type of written documentation also had its weaknesses, which is why the requirement to take only simple minutes was ultimately abolished.

The next step in investor protection

The entry into force of MiFID II represents a further step towards greater investor protection. Since the beginning of 2018, actual recordings of telephone calls made in connection with clients’ securities transactions have had to be made instead of a written summary. This recording requirement is also known as "taping". Banks are also required to record communications via modern electronic channels, such as online chats or video calls. The rule covers email correspondence as well.

But taping entails more than that. The recording requirement not only covers investment consultations but also any telephone or electronic communications related to the processing of client investment orders. Therefore, not only communications with clients are documented but also a bank’s back-office employees discussing client orders via the above-mentioned communication channels have to be recorded, for example when employees obtain price information from brokers or transmit orders to trading venues over the phone.

The records primarily serve to document whether and how the bank informed the client about the risks and opportunities of the recommended transaction as well as the features of the recommended financial instruments. Usually, neither the client nor the adviser knows what direction a telephone conversation is going to take when it begins. However, it is exactly this process of formulating a suitable recommendation based on the client’s wishes that is crucial for reconstructing the consultation subsequently.

The recording should therefore start as soon as the discussion moves towards investment services. In the case of dedicated investment hotlines, calls have to be recorded right from the beginning. The recording requirement thus counteracts the ephemeral nature of the spoken word in a telephone conversation.

Even if no consultation has taken place and the client receives non-advisory investment services, the records still serve as important evidence. In the case of non-advisory transactions, the records are limited to a summary of the transaction and a reference to it being non-advisory. But still, this shows exactly what the client wanted to buy or sell and whether the bank entered the order correctly and completely.

Access to recordings and data protection

If clients object to details of their private financial affairs being recorded over the phone, they can withhold their consent. In this case, however, the bank may not provide them with investment services over the telephone to prevent some clients from having a higher level of protection than others.

Frequently, the quality of an investment recommendation is largely determined by the client’s personal circumstances – beyond their risk appetite, investment horizon, knowledge and experience. For example: Are any exceptional expenses to be expected, such as expenses for caring for close relatives? Are there any children in financial difficulty who need support? Private details of this kind can be key to choosing the right investment. In the event of a dispute, an important factor would therefore be whether the client had raised these issues and whether the adviser took them into account when making a recommendation.

But if everything runs smoothly – as in the vast majority of cases – such information should remain in a protected trusted space between the adviser and the client. For this reason, the legal provisions stipulate very high standards for the protection of the records.

The recordings are to be protected from any unauthorised access and may only be analysed for specific purposes, for instance at BaFin’s request or to process client complaints. Also, the employees analysing the data are to be clearly identified in advance by the bank. Moreover, the compliance and audit functions of the banks may use the recordings to a limited extent for internal audits.

The retention period has been regulated by law as well. In general, the recordings have to be deleted after five years at the latest, although BaFin can extend this period to seven years on a case-by-case basis. As a matter of course, clients can request a copy of these recordings at any time during this period.

Conclusion

So is taping a surveillance operation or rather a safety net? This is a question that every bank client has to answer for themselves. There is extensive legal protection for the recordings, which is also aimed at preventing unauthorised access. In addition, the purposes for which the recordings may be used are clearly specified. In light of the above, this cannot, in any way, be described as a large-scale surveillance operation.

In addition, the recordings offer significant additional security for both parties. In contrast to a written summary, in which critical parts of the conversation may be lost, both the bank and the client can now be sure that all of the issues that have been discussed are documented. In case of a dispute, the clear evidence will ensure that lengthy disputes are less likely in future.

Considering the increasing importance of electronic channels of communication, the new recording requirements are a welcome development from a consumer protection perspective – a safety net for all parties involved.