UK regulator the Financial Conduct Authority (FCA) has found widespread failure in the delivery of best execution to both retail and institutional clients.
A review of 36 sell-side firms including broker dealers, investment and retail banks highlighted a poor understanding of best execution obligations, ineffective monitoring and a lack of accountability as key issues it discovered.
David Lawton, FCA director of markets, said, “Firms told us that best execution is a simple commercial imperative – yet our review shows many firms unacceptably fail to put their clients’ interests first, undermining market integrity and inhibiting competition.”
While brokers are required to ensure they achieve best execution on trades when acting on behalf of clients, the FCA said many of the firms it reviewed were using non-permissible carve-outs and relying on out-dated market conventions.
Similarly, it discovered firms were also failing to properly identify best execution failures and poor client outcomes, lacking effective monitoring procedures and failing to capture this in management information. Monitoring also often failed to cover all relevant asset classes or reflect all factors that should be considered for best execution.
Examples include one firm that had concluded fixed income fell outside of the scope of best execution requirements, while another thought futures and options were not covered, both of which are incorrect.
Other brokers had wrongly excluded algorithmic execution from their best execution, despite the rule applying to order routing logic used in algos.
As a result of the review’s findings, the FCA said, “All firms should…take immediate action to fully review their arrangements and policies to ensure scope is comprehensively understood and embedded within their business practices and supporting controls.
“This review needs to consider all relevant materials to ensure firms’ arrangements are consistent with our requirements regarding the application of their best execution obligations, including when dealing on quotes, dealing on own account and acting on client specific instructions.”
It added that firms undertaking a review of their best execution practices should ensure their assessments are clearly and consistently communicated to their clients. Additionally, firms should be aware that EU-wide rules on best execution are set to be introduced as part of MiFID II and should ensure they are aware of the implications of these rules in relation to the FCA’s findings.