UK regulator to record traders' calls to curb insider trading

LONDON: Traders' mobile-telephone calls may be taped in an effort to stamp out insider trading under new rules scheduled to be published by the UK financial regulator this week. The Financial Services Authority (FSA) has said cell phones used for business shouldn’t be exempt from rules requiring banks and broking firms to record employees’ calls so that they can be listened to later. In March, the agency said in draft proposals that around 22,000 phones would be covered.

“People who wouldn’t have complied anyway will find ways around the new regulations,” said Ian Mason, a partner at Baker & McKenzie in London. “Your committed insider dealer is going to find ways around that,” by using personal phones or meeting in bars, he said.

The US insider-trading case against Galleon Group’s chief executive officer, Raj Rajaratnam, was brought using evidence in part from mobile-phone conversations that the government received permission to wiretap. The FSA is increasing efforts to prosecute insider trading after criticism from lawmakers that it wasn’t doing enough to prevent the crime.

The regulator in September warned companies to prevent leaks to the media as part of its effort to crack down on market abuse. The FSA started to cold-call traders to interview them under caution two years ago about possible insider trading, a strategy that fell prey to hoax calls.

Galleon ‘Influence’

“The Galleon case may be an influence, but the FSA wants to toughen up on market abuse,” said Mason. “That’s been a big thing for them.” Chris Hamilton, an FSA spokesman in London, declined comment. The regulator said in March that the final rules would be published by the end of the year.

“We continue to work to keep undesirable people out of our financial services industry,” FSA enforcement chief Margaret Cole said in a speech on Tuesday. “We use information and intelligence from a range of sources to consider whether those who own or run financial firms, as well as people in sensitive roles within those businesses, are ‘fit and proper’.”

Companies should make sure employees don’t use private phones or e-mail for business to circumvent the recording, the FSA said. Banks would have the option of banning employees from using mobiles for business use, the regulator said in March.

Privacy Rights

“With many people having a single mobile phone for both business and personal use, organisations will need to establish a call recording protocol that does not infringe on an employee’s right to privacy,” said Charles Rich a sales manager for CTI Group, a provider of call management applications for the financial industry.

The FSA, facing dissolution by 2012, is lobbying for its enforcement unit to become part a proposed Consumer Protection and Markets Authority. Along with the independent CPMA, the UK plans to create a Prudential Regulatory Authority at the Bank of England to oversee financial regulation.

The FSA is currently prosecuting 11 people for trading with insider information and has convicted six men for the crime since March 2009. The agency never prosecuted a criminal insider-trading case before 2008.

“Our members fully support the drive to reduce the risk of market abuse,” said Rob McIvor, a managing director at the Association for Financial Markets in Europe, a trade group for the banking industry. “However, as with all regulation, such measures would inevitably introduce additional costs.”