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06 March 2017

AIMA: FCA publishes concerns regarding firms’ approach to best execution

The FCA published their findings from supervisory work looking at how investment managers deliver best execution for clients. This follows a thematic review on best execution and payment for order flow. The FCA’s view is that most firms have failed to take on board the findings from the thematic review.

The FCA has urged firms to consider a number of factors in reviewing best execution arrangements:

  • Who would the FCA hold responsible if the firm fails in its obligation to ensure it consistently achieves best execution? This should also be considered in the context of the extension of the Senior Managers and Certification Regime in 2018.
  • Do we have a comprehensive strategy for overseeing best execution? The FCA expects that firms consider best execution throughout the decision making process, and not just on the dealing desk.
  • Have we tested that funds and client portfolios are not paying too much for execution? Where we identified they have paid too much did we compensate the investors?
  • Does our order execution policy accurately reflect our firm’s business model rather than being a generic policy?
  • What trades or trends have been identified as deficient through our regular monitoring? The FCA has noted the importance of ensuring compliance staff are empowered to provide effective challenge to front line staff on execution quality. Firms should also be able to demonstrate
  • Is our gift and entertainment policy in line with the guidance set out in our Finalised Guidance 14/1 and the FSA’s 2012 Dear CEO letter (PDF)?
  • Have our staff been adequately trained to ensure they understand what best execution means and its consequences? How can we evidence this to the FCA?

The FCA has confirmed that it will be “revisiting best execution in 2017 to see what steps investment management firms have taken to assess gaps in their approach to achieving best execution and how they evidence that funds and client portfolios are not paying too much for execution.” With MiFID2 raising the standard for best execution, the FCA has reiterated the need to improve current practices. In the event that standards and practices are not improved, the FCA confirms it will consider taking further action, including investigations into specific firms, individuals or practices.

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