Regulating banks serves primarily to protect bank customers and guarantee the stability of the financial system. Banking and financial market regulation takes place in various legal forms. While the foundation is standardized on legislative level (e. g. Banking Act, Financial Market Supervision Act), the content is stipulated in detail by directives adopted by the Federal Council (e. g. Banking Directive).
In addition, there are directives and circulars issued by the Swiss Financial Market Supervisory Authority (FINMA) as well as self-regulations (guidelines, recommendations) of the financial sector. Primarily responsible for banking and financial market regulation is FINMA as an independent supervisory authority of the Confederation. FINMA instructs audit companies as statutory auditor (dual supervisory system) to monitor the banks.
To prevent money laundering, insider agreements or deliberate misinformation in consultant calls in the financial sector, five years ago the Swiss legislator introduced a regulation on the provability of orders, consultations and decisions.
FINMA: Obligation to record, archive, and protocol calls
This regulation according to FINMA includes an electronic recording obligation which applies not only to internal and external fixed-network calls but also to mobile calls, electronic correspondence, multi-media communication channels (SMS, chat) and the corresponding additional data. Recordings must be archived unaltered for at least two years for FINMA's purposes. Using means of communication for which recording cannot be guaranteed is not permitted.
To ensure that these recordings can serve as evidence in the event of a legal dispute, the requirements of the Swiss regulation for business records management (GeBüV) must be taken into account. In addition to the recording obligation, further requirements from the Internal Control System (ICS), internal compliance, data protection, protection of personal rights as well as education and training must be observed.
Purpose of the obligation to record, archive, and protocol calls
- Compliance with regulatory and legal requirements
- Increasing legal security and protection against unjustified claims
- Proving a professional approach and in-detail compliance with the legal duty to inform
- Two-step order processing through confirmation of the protocol or explicit consent by the customer
- Optimizing communication and business processes
- Demonstrating responsible corporate governance
The Swiss version of MiFID II: Fidleg
The obligation for audio recording in the banking sector does not only apply in Switzerland, though: In May 2014, the European Parliament passed an amended Financial Markets Directive (MiFID II) to protect bank customers. With this complex set of rules, the EU intends to better protect small investors and eliminate conflicts of interest. It is supposed to make the financial system more secure, more transparent and increase its accountability. Since the beginning of 2017, phone and consultation calls must be recorded in all states of the EU and EEA - in fixed-line as well as in mobile networks.
The EU regulations take their toll on Switzerland, too. Although Switzerland is no member state of the EU, Swiss financial institutions with customers in the EU or trade there that do not want to give up business with EU customers cannot help but implement the directive. And Swiss financial services providers generate a significant share of their sales in the EU.
Therefore, the Swiss legislator has launched a Swiss variant of MiFID II - the Financial Services Act (Fidleg) - which has been designed as a slimmer set of regulations recognized by the EU as equivalent in Switzerland. After all, MiFID II stipulates that financial institutions from third countries are only admitted to the EU market if their supervisory rules and rules of business conduct are equivalent to those in the EU.
Mr. Bütler, Fidleg and its corresponding regulations have been in force since 1st January 2020. However, regulations such as the obligation to record phone calls are not included. How is recording and archiving implemented in practice?
Banks have different approaches. When it comes specifically to recording calls, it is FINMA that stipulates clear regulations. Fidleg does not include any specific regulations regarding who or what must be recorded. The large banks have their own compliance guideline to decide this. The recording may comprise all communication in the bank or only individual areas such as back office, brokerage or trading. However, the pronounced tendency is to record all communication. After all, it is about ensuring the greatest possible security especially when it comes to being able to prove the content of calls.
Archiving of recordings is also handled differently by different banks. Some keep recordings for two years as stipulated by FINMA, others up to ten years. In addition, each financial institution has different customers from different countries and as a result must comply with their regulations. For example, there are trade floors at banks in Switzerland that only have European contacts and these are then guided by the regulations of MiFID II. Other separate their compliance, so to speak: Half of the trade floor is responsible for Europe complying with MiFID II; the other half works with Switzerland and is thus subject to FINMA regulations and Fidleg.
What are the effects of recording and archiving, in your opinion?
Guaranteeing traceability and transparency. I. e. to be able to subsequently find out what exactly has been discussed. So that in case of a litigation, tamper-proof recordings are at hand that can be referred to. Furthermore, it is about traceability in case of ambiguities. Let’s take the trade floor, for example. In this busy atmosphere it is all too easy that passages of a call become a blur. It is a massive help then to be able to listen to a call once again to ascertain what exactly has been ordered.
Recording is important for risk management and compliance, too. That is, to be able to see the risks that a bank takes. Are you actually sure that you want to take these risks and does the employee meet the stipulations and compliance requirements? On top of that, banks have internal auditors who listen to such recordings again on a sample basis and ask questions like: Did the employee behave correctly? Did the employee ask all necessary questions such as whether tax has been paid on the money? For banks this is also some kind of quality assurance.
Are there peculiarities for Swiss banks that affect recording?
Switzerland is characterized by a very diverse culture. This does not only refer to its population coming from 126 different nations but of course also to Swiss polyglotism. In addition to the four national languages German, Italian, French, and Romansh, many different local dialects can be heard all over the country. This is a true challenge when trying to spot keywords in a recording, for instance.
But compliance is affected as well. After all, not everyone understands all languages and dialects. This makes trading more difficult and eventually more dangerous. All the more important is recording to eliminate misunderstandings and increase the traceability and transparency of calls. In other words: The complex culture of the Swiss population also influences the Swiss financial business. But despite or perhaps exactly because of this complexity and the many facets, the Swiss financial market is particularly exciting for me.