FCA’S THEMATIC REVIEW ON BEST EXECUTION DELIVERS SCATHING REPORT.

As thematic reviews from the Financial Conduct Authority (FCA) go the UK financial regulator’s latest, entitled ‘Best Execution and Payment for Order Flow’ (TR14/13), was probably not the weightiest at a mere 55 pages, but it still packed quite a punch.

One of the biggest issues with the term best execution, even since MiFID first tried to define it, is that it continues to mean different things to different constituents – be they buyside or sellside, retail or institutional. This inconsistency may well explain why the FCA’s review provided a scathing assessment of the financial industry adoption and application of their rules on best execution.

Against this backdrop TR14/13’s supervisory findings and conclusions ran to 26 pages and spanned five sections: (1) the scope of best execution; (2) monitoring of best execution; (3) executing internally or through connected parties; (4) accountability for delivering best execution; and, (5) payment for order flow (PFOF).

The review’s key findings were that very few firms were fully cognisant of their best execution obligations, were relying on use of prohibited carve-outs and frequently they had insufficient controls and lines of responsibility to ensure best execution was being provided to their end clients.

The FCA states that its document is “relevant to all firms that execute, receive and transmit or place orders for execution, including investment managers.” That said, whilst this review of 36 firms across five different business models did not include investment managers, “many of its conclusions will also be of interest to these firms, given their need to act in the best interests of their underlying clients,” the FCA said.

In terms of what follows next, the UK regulator will shortly write to all the firms in their thematic sample to provide individual feedback of the findings. A communiqué from the FCA stated: “We will require firms to take immediate action to address all relevant areas of our findings. As well as asking them to confirm they are no longer receiving PFOF, we will require confirmation that firms fully understand the scope of their best execution obligations to clients and the steps they are taking to reflect these obligations in their execution arrangements.”

In terms of preparation “all investment firms should review their arrangements for delivering best execution and ensure they are not receiving PFOF”, the regulatory authority said. Firms need to ensure that business practices are fit for purpose and that these are supported by what the regulator refers to as appropriate “second-line of defence controls”.

Furthermore, all firms also need to assess the risks and issues identified in TR14/13 in the context of future regulatory developments. Additional obligations in the recast MiFID II are intended to address some of the specific weaknesses observed in this work, especially relating to the adequacy of monitoring. “Firms need to improve their current systems and controls and be ready for the implementation of future policy change,” the UK regulator asserted. One might think though that firms had already had ample time.

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To download the FCA report ‘Best Execution and Payment for Order Flow’ (TR14/13) click here

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