Changes to the existing best execution regime.
MiFID II introduces changes to the existing best execution regime. It strengthens the governance aspects of best execution, so instead of firms having to take “reasonable steps” to get the best possible results for their clients, taking into consideration factors such as cost and price, they will now have to take “all sufficient steps” which is a much higher bar. It places a specific obligation on firms to check the fairness of prices proposed to clients when executing orders or taking decisions to deal in OTC products and it also introduces other changes aimed at increasing the scope and transparency.
These changes reinforce the importance of best execution as a key component of investor protection. They will be challenging to implement as evidenced by a number of reviews, conducted by regulatory agencies across Europe, of best execution under the existing MiFID framework. The findings from these reviews is that the level of implementation and convergence of best execution practices is currently quite poor, even though there has been some improvement.
In 2015, ESMA performed a peer review of European regulators and found that there was a low level of supervisory activity devoted to monitoring best execution as well as a low level of understanding by investors. In the follow up report in January 2017, ESMA found a definite improvement in the level of attention being paid to best execution but highlighted the need for continued efforts to ensure compliance.
The Central Bank of Ireland conducted a themed inspection of best execution practices under MiFID in investment and stockbroking firms in 2012. That inspection raised many concerns about the adequacy of policies and the effectiveness of procedures.
The most extensive work in this area has been done by the Financial Conduct Authority (“FCA”), both in a thematic review in 2014 and in its recent asset management market study. Its overall assessment is that investment managers are still failing to ensure effective oversight of best execution and that the pace of change to ensure improved client outcomes is slow.
The FCA’s concerns included;
However the FCA has highlighetd some good practices;
To ensure MiFID II readiness and future compliance, firms will need to improve current practices and this is borne out by the experience of regulators across Europe.