SEBI Demands Communications Recording in India
In recent years, Financial Services Organizations (FSOs) from countries around the world have faced growing scrutiny from regulators and mounting pressure to provide better records around trade communications.
Now, the Securities and Exchange Board of India (SEBI), is the latest market regulator to join the fray. Under a new order, as of January 1, 2018, financial firms in India must adhere to a new mandate and record all communications associated with orders placed by clients.
As the designated regulatory body for the finance and investment markets in India, SEBI has oversight for creating and enforcing regulation in India's financial marketplace, similar to the U.S. Securities and Exchange Commission (in the U.S.) or the Financial Conduct Authority (in the UK). SEBI has the power to draft regulations under its legislative capacity, conduct investigations and impose action under its executive function.
What’s at the root of this regulatory change?
In 2013, data indicated stock exchanges in India were flooded with complaints related to unauthorized trading by brokers on behalf of their clients. Exchanges attempted to address the malpractices by sending investors text messages and email alerts after a broker carried out a transaction.
This egregious activity didn’t escape SEBI’s attention. At the time, the Chairman of SEBI wrote:
’Unauthorized Trading’ or more appropriately ’allegations of unauthorized trade’ is one of the most serious and damaging allegation that haunts stock markets worldwide, India being no exception. Today, the bulk of investor grievances in India against intermediaries are classified under ’Unauthorized Trading.’
What does this mean?
Over the years that have followed, the issues of unauthorized trading continue to plague markets in India. To counter this, SEBI launched an aggressive investor education campaign, and created a centralized online system for lodging and tracking complaints.
The past September, things really heated up when SEBI released an order shifting the burden of proof to the broker in disputed trades. Specifically, the new order stipulates, that beginning January 1, 2018, brokers shall execute trades of clients only after keeping evidence of the client placing such order. All client orders must be evidenced in one of the following ways:
- physical records written and signed by a client,
- telephone recording, or
- by other means such as SMS messages, e-mail, or other legally verifiable records.
Furthermore, the new regulation states that when orders are received from clients over the telephone, brokers must record the conversation and instructions as part of their records.
The Association of National Exchanges Members (ANEM) of India responded by writing a letter to SEBI, in which they called the new measure impractical. ANEM takes the position that telephone recording at the dealer’s terminal (with accuracy of voice identification), and retrieving resulting communications is difficult. The association takes the further position that recording multiple modes of communications that clients routinely use (e.g. email, text, chat) is difficult as well, as is tracking modifications and cancellations to orders.
Believing these regulations are long overdue, however, SEBI, shrugged over these concerns stating: "The decision has been taken to further strengthen provisions against unauthorised trades and to harmonise the requirements across markets."
Worldwide trend to prevent market abuse
The fact is – the new SEBI rules in India mirror a larger, worldwide trend to discern intent and prevent market abuse. MiFID II, FX Code of Conduct, and Dodd-Frank all require trading communications to be monitored and recorded with varying degrees of severity. SEBI has not given any indication it will budge from the January 1st deadline, or that it will alter the rule prior to January 1st, and this has left financial firms in India scrambling for solutions.
But they don’t really need to look too far. The technology to comply with these regulations is already in use all around the world. Today’s technology has the ability to associate the multiple communication channels used by traders and support personnel with trade information for effective data management that will meet the needs of regulators, both now and in the future. As India begins to improve investor protections, firms will be compelled to adapt to this new regulatory reality. Those who quickly and effectively do so will gain an advantage over their competitors by embracing effective data management, automation, and compliance.
Navigating & Automating Compliance
Educational Webinar Series addressing communication compliance and assurance pain points around expanding regulations, incl. Dodd-Frank, Code of Conduct, and MiFID II