Retail and professional clients are being failed by firms that don’t properly apply the rules on best execution when trading on their behalf, according to a review by the Financial Conduct Authority (FCA).
Looking at 36 firms the FCA found that many firms do not understand key elements of the rules and are not adequately controlling client costs when executing orders. These failings were compounded by insufficient managerial oversight or engagement from front office staff for delivering best execution.
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. The FCA expects to see firms act as good agents, placing equal focus on controlling client costs as delivering returns, and will take action where firms fall short of our standards.”
Firms must take a range of factors into account (such as price, speed and order size) to ensure they consistently deliver the best result when executing client orders. However the FCA found:
- The rules were often poorly understood or incorrectly applied with frequent attempts by firms to limit their obligations to clients.
- Four firms attempted to evade FCA rules by changing the description of services they offered to clients so they could continue to receive payment for order flow, despite clear guidance on this in 2012. The firms we reviewed have ceased this practice and the FCA will take action against any firm where it continues.
- Most firms lacked the capability to effectively monitor order execution or identify poor client outcomes.
- Firms were often unable to demonstrate how they managed conflicts of interest when using connected parties or internal systems to deliver best execution for their clients.
- It was often unclear who was responsible for best execution. Reviews often focused on process rather than client outcomes, with insufficient front office engagement.
The FCA expects all firms to review their best execution arrangements in light of these findings and take immediate action to ensure that they comply with our rules.
This review comes ahead of the introduction of enhanced EU-wide rules on best execution and is linked to the FCA’s work on firms’ use of client dealing commission and how they discharge their duty to act as good agents.
The FCA has a statutory objective to promote the integrity of the UK financial system and secure appropriate protection for consumers.
Notes for editors
- The review: TR14/13 - Best execution and payment for order flow[1].
- The review included:
- Retail banks
- Investment banks
- Wealth managers
- Providers and brokers of shares in contract for difference (contracts where the profit made or loss avoided depends on changes in the price of an underlying financial instrument, index or benchmark)
- Brokers of options traded on the London International Financial Futures and Options Exchange (LIFFE)
- The rules on best execution apply to activity carried out on behalf of retail and professional clients, and cover a range of asset classes set out in European legislation (Markets in Financial Instruments Directive, MIFID) including fixed income, commodities and equities.
- Regulatory guidance on payment for order flow[2]. This practice creates a clear conflict of interest between the firm and its clients.
- July 2014 FCA discussion paper on client dealing commission[3].
- On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA[4].