Yet despite the financial imperative, according to a new review by the regulator, many companies are not doing enough to ensure the effective trade implementation and proper monitoring of best execution.
By best execution, the FCA means the obligation of firms to ensure they take all “reasonable steps” to obtain the best possible result when executing client orders or placing such orders with other entities.
However, it said while many of 36 firms across five different business models (investment banks, contract for difference (‘CfD’) providers, wealth managers, brokers/interdealer brokers and retail banks) reviewed told the FCA that it was a commercial imperative that was both expected by clients and automatically delivered to them, the FCA’s findings showed that “not enough is being done by firms to ensure best execution is being consistently delivered to clients, including taking into account the impact of changing market structure and the emergence of new products.”
While the FCA acknowledged that because the obligation is not prescriptive and the requirement is to provide consistent best execution rather than in every individual case, the range of permissible approaches is fairly broad, it points out that “Overall, very few firms could provide evidence that the steps they were taking were sufficiently rigorous to consistently obtain the best possible result for their clients”.
And, importantly, it said, the failings it identified when it reported the findings of thematic work undertaken in 2009 have not been addressed to a significant degree.
“All firms were unable to demonstrate to us that their front-office staff had a consistent understanding of the scope of best execution in relation to different categories of client, market models or instruments and that staff were supported by robust controls which could demonstrate when clients were relying on their agents to deliver best execution.”
As a result of this, the FCA said, “Firms need to ensure that business practices are fit for purpose and that these are supported by appropriate second line of defence controls.”
It adds: “Our findings not only highlight that a failure to obtain best execution on a consistent basis presents a risk of detriment to individual clients, but that it also presents risks to trust and confidence in the integrity of our markets, as well as potentially undermining competition between trading venues.”
According to the FCA, certain obligations outlined in Markets in Financial Instruments Directive (MiFID II) are intended to address some of the specific weaknesses observed in this latest review document, which means that companies will have to improve their current systems and controls if they are to be ready for any future policy changes.
“These improvements will need to be broadly applied, since the new obligations under MiFID will enhance reporting requirements across relevant asset classes,” It added.
