FCA Publishes Findings of Review of Best Execution and Payment for Order Flow

The UK Financial Conduct Authority ("FCA") published a paper presenting the findings of its review of best execution and payment for order flow ("PFOF").

The review included 36 firms across five different business models: investment banks, contract-for-difference providers, wealth managers, brokers/interdealer brokers and retail banks. According to the FCA, the findings are relevant to all firms that execute, receive and transmit or place orders for execution, including investment managers. Additionally, the FCA stated, many of the conclusions will be of interest to investment managers even though they were not covered in the review.

The review regarding best execution included the following findings:

• there was a poor level of understanding of which activities are covered by the obligation to provide best execution, and frequent attempts were made by firms to limit the scope of the obligation in their dealings with clients;
• most firms lacked effective monitoring capabilities to identify best-execution failures or poor client outcomes;
• firms that relied heavily on internalization, or on executing orders through connected parties, were often unable to show whether this delivered best execution and how they were managing potential conflicts of interest; and
• it was often unclear who had responsibility and ultimate accountability for ensuring that execution arrangements and policies met FCA requirements.

Regarding PFOF, the review found that a small number of market participants still continued to receive PFOF by changing the description of the service they provided to clients, which is not compatible with FCA rules.

The FCA stated that it would be writing to all the firms in its review shortly to provide individual feedback on the findings and to require the firms to take immediate action to address relevant areas of the findings. Additionally, the FCA stated, it will require confirmation that the firms are no longer receiving PFOF, and that they fully understand the scope of the best-execution obligations.

See: FCA Thematic Review: Best Execution and Payment for Order Flow; FCA Press Release.