EMSA Peer Review

As may be recalled, last July the FCA released the results of a thematic review (TR14/13) on ‘Best execution and payment for order flow’; the conclusion was that most firms were not doing enough in this area – see Complyport Alert.  The best execution rules and guidance are, of course, in COBS 11.2.

ESMA has now stepped into the frame with the publication of its peer review (2015/494) on how national competent authorities (NCAs) supervise and enforce the MiFID requirements relating to best execution.

The review was based upon information provided by 29 NCAs and on-site visits between June and August last year to the NCAs of France, Liechtenstein, Luxembourg, Malta, Poland and Spain.  Although the UK was not subject to a visit, chapter 3 informs us that most of the firms subject to best execution are located in the UK (4,143 firms), followed by Germany accounting for 2,485 firms and France (956).

Findings in the report include:

  • oversight of best execution is usually a component of the supervision of general conduct of business issues and is often limited to simply verifying that an execution policy exists
  • best execution is often only viewed in terms of price without regard to the other execution factors (cost, speed, likelihood of execution and settlement and order size)
  • execution venues tended to be concentrated in the main domestic market with little in the way of alternative venues
  • monitoring of best execution of non-equity and less liquid markets is largely absent
  • the low rate of investor complaints relating to best execution may well be down to a lack of understanding.

Future work by NCAs and ESMA identified include:

  • providing guidance for the national implementation of MiFID rules to ensure common understanding
  • assessing the adequacy of NCAs’ resources devoted to the supervision of best execution
  • providing guidance to help NCAs develop assessment criteria to be used when firms use only one execution venue
  • developing specific consumer education programmes.

Although ESMA’s role is not really the ‘supervisor’s supervisor’, given the FCA’s previously voiced concerns on best execution, it wouldn’t take much stretch of the imagination to believe that the FCA will fully take on board the comments within the peer review and continue its focus on this area.  We would recommend that firms subject to COBS 11.2, and that have not yet reviewed their existing processes and procedures following the publication of TR14/13, should ensure that such a review is suitably prioritised. It would, of course, be prudent for the review to take into account the findings in both TR14/13 and the ESMA peer review.

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