Avoiding the Compliance Time Bomb: What Happens When You Fail an Audit
It happens more often than you’d think – we find ourselves on a sales call with a prospective customer in the financial services world, unmistakably a regulated industry, and as we discuss the details and economics of a true compliance-caliber call recording platform, their frame of reference keeps bouncing back to a non-compliance-caliber alternative.
It gets worse. In our discovery interview, we realize they’re not using an adequate compliance-caliber call recording solution at present.
The call quickly shifts from a typical sales call to one more akin to helping de-fuse a bomb over a Teams call. This prospective client is unknowingly sitting on a truly explosive situation – one that could easily destroy the company’s brand reputation, stock price, and management team’s prospects. So, it becomes our mission to do more than just sell them on IXCloud. It becomes a mission in service of helping the global community, of doing global good, and hopefully adding to the karmic scales that we gently but firmly guide this customer to safer ground, quickly.
Call recording itself serves a really vital risk management and risk reduction function in regulated industries, and is a mandatory requirement exactly these reasons, choice of a call recording solution that actually increases business risk could perhaps be seen as ironic.
Compliance isn’t just a box to check for financial services companies. It’s a critical safeguard against reputational damage, regulatory penalties, and operational disruption, and not to mention fraud prevention. . Among the most overlooked yet essential areas of compliance is call recording. Whether you’re a broker-dealer in New York or a wealth management firm in London, failing to meet call recording requirements can trigger a cascade of consequences.
This post explores how audits happen, why firms fail them, and what penalties await those who don’t take compliance seriously – especially in the realm of call recording.
How an Audit Happens
In both the US and UK, compliance audits are conducted by a mix of internal teams, external auditors, and regulatory bodies. In the US, agencies like the SEC, FINRA, and CFTC oversee financial services audits. In the UK, the Financial Conduct Authority (FCA) and Information Commissioner’s Office (ICO) take the lead.
Audits may be routine, triggered by complaints, or part of broader investigations. Increasingly, regulators are using AI and analytics to detect anomalies in communications, making it harder for firms to hide non-compliance.
Audits typically follow a structured process:
- Scope Definition – Identifying applicable regulations (e.g., MiFID II, SEC Rule 17a-4).
- Evidence Collection – Gathering call logs, recordings, policies, and access records.
- Fieldwork – On-site inspections, interviews, and system testing.
- Analysis & Reporting – Highlighting gaps, issuing findings, and recommending remediation.
Why Do Financial Services Companies Fail Audits Due to Compliance Call Recording Mistakes?
Despite the clear mandates, firms often stumble in several key areas:
- Incomplete or missing recordings: Calls that should be recorded under MiFID II or SEC rules are not captured.
- Improper retention: Recordings are deleted too early or stored in non-compliant formats.
- Lack of encryption: Sensitive data is stored without adequate security.
- Off-channel communications: Use of WhatsApp, Signal, or personal devices bypasses official recording systems.
- Poor vendor oversight: Third-party recording platforms may not meet regulatory standards.
- Inadequate audit trails: Firms cannot demonstrate who accessed recordings or when.
These failures often stem from manual processes, outdated systems, and a lack of executive buy-in for compliance priorities. And even simply from an inability to justify recording service quality against significantly reduced compliance risk – sometimes cheap can become really expensive.
What Happens If You Fail an Audit? – United States
What happens when you and your company get caught and fail an audit? In the US, the consequences of failing a compliance audit due to improper call recording are severe:
🔹 Penalties
- Fines: Over $2 billion in penalties have been issued across multiple firms. For example:
- Wells Fargo was fined $200 million for recordkeeping failures.
- 12 firms were fined $63 million by the SEC for similar violations.
- Sanctions: PCAOB issued $35 million in fines in 2024 alone.
- Operational Restrictions: Firms may lose licenses or face trading bans.
- Reputational Damage: Public enforcement actions erode client trust and investor confidence.
🔹 Case Study: Wells Fargo
In 2023, Wells Fargo was fined $200 million for failing to properly record and retain electronic communications, including calls and texts. The SEC cited systemic failures in supervision and recordkeeping, highlighting the importance of robust compliance infrastructure.
🔹 Regulatory Bodies Involved
- SEC (Securities and Exchange Commission)
- FINRA (Financial Industry Regulatory Authority)
- CFTC (Commodity Futures Trading Commission)
- PCAOB (Public Company Accounting Oversight Board)
What Happens If You Fail an Audit? – United Kingdom
In the UK, the regulatory landscape is equally unforgiving:
🔹 Penalties
- Fines: Multi-million pound penalties are common.
- Barclays was fined £40 million for transparency failures.
- Macquarie Bank was fined £13 million for inadequate systems.
- Enforcement Actions: Public censure, license revocation, and business restrictions.
- Legal Liability: Clients may sue for losses tied to poor recording practices.
🔹 Case Study: Barclays
Barclays faced a £40 million fine for failing to maintain transparent and retrievable records of client communications. The FCA emphasized the importance of secure storage, audit trails, and retention policies aligned with MiFID II.
🔹 Regulatory Bodies Involved
- FCA (Financial Conduct Authority)
- ICO (Information Commissioner’s Office)
- MiFID II (retained in UK law post-Brexit)
What Financial Services Companies Need to Do: A Compliance Call Recording Checklist
To avoid the compliance time bomb, financial services firms should implement the following:
✅ US Checklist (SEC, FINRA, CFTC)
- Record all communications related to transactions (calls, texts, chats).
- Use WORM (Write Once Read Many) storage.
- Retain recordings for 5–7 years.
- Encrypt recordings in transit and at rest.
- Monitor for off-channel communications.
- Maintain audit trails and access logs.
- Train staff regularly on compliance protocols.
✅ UK Checklist (FCA, MiFID II, UK GDPR)
- Record all calls that may lead to a transaction.
- Retain recordings for at least 5 years.
- Ensure secure storage and encryption.
- Obtain lawful basis or consent under UK GDPR.
- Maintain access controls and retrieval capabilities.
- Monitor third-party vendors for compliance.
- Conduct regular internal audits and staff training.
Conclusion
In financial services, the cost of non-compliance is measured not just in fines, but in lost trust, damaged reputations, and disrupted operations. Call recording may seem like a technical detail, but it’s a cornerstone of regulatory integrity.
Whether you’re operating in the US or UK, the message is clear: compliance is not optional. Firms must invest in secure, auditable, and policy-aligned call recording systems—and ensure their teams understand the stakes.
Because when the audit comes—and it will—you want to be ready, and if the reason for an audit is because someone else has done something wrong – you really need the confidence of knowing you are 100% compliant before anyone asks!.
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