FCA Stresses Best Execution Under MiFID II

Terry Flanagan

Maggie Craig, acting head of savings and investments, at the Financial Conduct Authority said the UK regulator will expect firms to increase their monitoring of execution quality in the European Union under new regulations covering trading in the region.

The FCA held a conference on 18 September 2014 on the revised Markets in Financial Instruments Directive which outlined changes in the EU directive that will impact investment firms.

Craig said at the conference that MiFID II requires firms to publish the top five venues where they executed client orders with the intention that increased transparency will bring increased scrutiny.

“The driver for these new obligations is obvious – our own supervisory work has, like studies in France and Ireland, exposed weaknesses in firms’ ability to monitor the quality of execution achieved – and we have made it clear that we expect firms to do more to monitor and review their execution quality,” added Craig. “But, in practice, the requirements will present technical challenges, owing to the relatively granular reporting of execution quality obtained that will be required.”

In addition Craig said MiFID II will change the way that firms conduct business up and down the supply chain and bring new governance requirements for senior management.

Senior executives are made responsible for product oversight and the consultation paper from the European regulator propose that a firm’s management body endorse the range of products and services to be sold and the target markets.

“I would very much encourage you to bear in mind that the new requirements are not simply about systems,” Craig said. “In many ways, what is much more important is taking responsibility, at a senior level, for what you make or what you sell; what it does; and in whose hands it ends up. This is potentially one of the most significant changes to conduct that MiFID will bring.”

The new regulation also increases the focus on the systems and practices firms need to have in place to identify and manage risk. “As the new directive makes very clear, where the avoidance of risk to consumers is within a firm’s gift, it will need to be very clear why risk is being taken at all,” added Craig.

The U.K. regular said that in response to the UK Parliamentary Commission on Banking Standards it will review financial incentives for sales staff when it implements MiFID II.

“As with product governance, firms will see us codify our expectations in rules – starting with a basic requirement not to remunerate, or assess the performance of staff in way that conflicts with a firm’s duty to act in the best interests of its clients,” she added.

An ‘appropriateness test’ will require firms to check whether investors capable of understanding more complex products before a purchase will be extended to a wider range of instruments under MiFID II.

“This seems like a measure that should be complementary to sensible product governance, and yet I get the sense that some firms would move heaven and earth to get particular products moved back outside of the scope of the test,” said Craig.

Firms will also be required to disclosure the total cost of an investment, in a way that shows the cumulative effect of costs on the investment return and the FCA is aiming implement new standards in this area.

Craig concluded: “The mindset of senior managers, system designers and staff at all levels throughout different organisations will need to reflect the new responsibilities being created when it comes to areas like product governance and staff remuneration.”

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