European national regulators must do more to ensure best execution is adequately supervised and practiced among regulated firm, a report from the European Securities and Markets Authority (ESMA) has said.
A peer review of national competent authorities (NCAs) on their implementation of best execution provisions found that the level of convergence between them was low and advised several improvements. Though the review was focused on achieving best execution for retail investors, institutional order execution quality has also come under increased scrutiny.
“A number of factors, including differing views on the application of the best execution requirements, lack of supervisory focus, insufficient resources and market structure issues have contributed to the current situation,” said Steven Maijoor, chair of ESMA.
The review looked at policies of 29 NCAs across Europe, with on-site visits to several national regulators, and found many included best execution provision within general conduct of business issues, meaning it was often limited to simply establishing whether an execution policy existed, rather than assessing how firms measure execution quality.
Regulators also frequently only considered price as evidence of best execution, rather than other important factors such as speed, likelihood of execution and order size. It also found there was little monitoring for execution quality outside of equity markets.
ESMA has recommended NCAs and itself provide guidance on the national implementation of MiFID rules to ensure best execution rules are understood. It also called on NCAs to devote more resources to supervision of execution.
It also told NCAs to use sanctions to create a “credible deterrent” against firms that may breach the rules.
The ESMA review follows a review in the institutional market conducted by the UK’s Financial Conduct Authority (FCA), which found a number of brokers failed to fully understand the broad requirements to ensure they achieved best execution.
It found that brokers frequently made incorrect assumptions about best execution and often thought it was only applicable to equities, rather than other asset classes such as fixed income and FX.