Best Execution – Again

It would not be entirely fair to accuse the Regulator of banging-on endlessly about best execution. Until the publication of the Thematic Review in 2014 (TR 14/13), it had said nothing about it for years. And there was precious little evidence that they were looking seriously at it on supervision visits. So what has changed? Well, just about everything, really.

You will have noticed, I am sure, that FCA published a press release in March to which they gave the less than endearing title of ‘Investment managers still failing to ensure effective oversight of best execution’. Investment managers still failing to ensure effective oversight of best execution | FCA And on the same day they published a similarly entitled press release about firms’ inadequacies over use of commission. This is not entirely normal; when FCA wants to comment on standards of compliance it usually uses a TR, so why the change?

Let me reassure you that this is not just anorak analysis – there is a significance in this that transcends the train-spotter comments. First, we have some changes of style resulting from the still fairly recent arrival of Andrew Bailey. Although a measured man, the length of fuse is limited and he is rather more politically astute than most of his predecessors. Pre-empting criticism is a clear trait that we should expect to go on seeing from a Bailey-led regulator. But why this and why now?

One reason is the link between best execution and use of commission. However poorly explained the FCA’s concern on this might be, the forthcoming purification of execution charges under MiFID II, refocuses attention on commission rates and so should enhance competition, which is becoming a major theme of FCA’s, as you will have spotted. Add to that the need to see execution charges fall when research must be separately paid for – unless FCA is to be seen to have done little but to raise costs for consumers.

Anyway, MiFID II is supposed to improve the effectiveness of the best execution regime. Insignificant as the forthcoming rule changes might seem, their intention is to oblige firms to adopt order execution policies that are more than platitudes and good intentions and cease to be diluted to the point of meaninglessness by exceptions, discretions and record regimes that provide no explanation of decisions made.

And then there is ESMA. Never will FCA admit that its supervision policy is driven by anything other than its own risk assessment. However, when ESMA publishes league tables of the activity of national regulators, FCA has no wish to have to explain to parliamentary committees or anyone else why it has ignored long-standing and pivotal requirements. The 2014 TR was inspired by the knowledge that ESMA would shortly publish and the pressure remains. As we said in our comments that year, what the regulator starts it will have to finish.

So much for the motivation; what about the substance? With MiFID II in force in eight months’ time, the FCA wants to see preparation on the go. Here is an area where firms need to be seen to be completely on top of the requirements, including being able to show that the matters raised in TR 14/13 have been reviewed. Most firms will have gaps to fill when the analysis is done and many will have yet to complete that analysis. Overstretch is a wide-spread and long-standing problem for compliance teams, but they should have no difficulty in proving that this is a task that has to be done. On looking at best execution, the first demand of the regulator will be to see the gap analysis work. Where finding none, it will do it itself, but by no means free of charge.

Striking also are the questions posed in the press release. The first says it all: “who would the FCA hold responsible if the firm fails in its obligation to ensure it consistently achieves best execution?” Let it not be you.


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