Published: 29th March 2017

Of Relevance to:
Investment Managers

The FCA has published a statement on its website to the effect that investment managers are (still) failing to ensure effective oversight of best execution. It’s not the first time that the FCA has published work related to best execution – see Regulatory Roundup 58 concerning the FCA’s thematic review TR14/13 “Best execution and payment for order flow”.

Following supervisory work, the FCA was concerned to find that most firms had failed to take on board the findings in the thematic review, with many of them not having conducted a gap analysis since 2014.

The FCA statement includes the following questions which it expects firms to consider:

  • Who would the FCA hold responsible if the firm fails in its obligation to ensure it consistently achieves best execution?
  • Do we have a comprehensive strategy for overseeing best execution?
  • 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/clients?
  • 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?
  • Is our gift and entertainment policy in line with the guidance set out in the FCA’s Finalised Guidance FG14/1 and the FSA’s 2012 Dear CEO letter?
  • 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?

We are warned that the FCA 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 those firms can evidence that funds and client portfolios are not paying too much for execution. Should the FCA find that firms are still not fulfilling their best execution obligations they will consider appropriate action – including more detailed investigations into specific firms, individuals or practices.

The FCA has been equally critical of the oversight by investment managers in the use of dealing commission – see “Use of Dealing Commission” article in this Regulatory Roundup.

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