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FCA to Target Investment Managers that Fail to Meet Best Execution Obligations

FCA to Target Investment Managers that Fail to Meet Best Execution Obligations

On 3 March 2017, the FCA published brief findings arising from its supervisory work on delivery of best execution.

Following a thematic review on best execution and payment for order flow completed in July 2014 and its asset management market study of November 2016, the FCA found that "most" investment management firms had failed to take on its findings, and that few firms had a "cohesive strategy" for improving client outcomes.  In the course of supervisory work, the FCA found that:

  • many firms had not conducted a robust gap analysis since 2014 and, as a result, had not addressed the poor practice outlined in the thematic review;
  • whereas all firms had management information that allowed them to accurately view equity execution costs, use of that data was inconsistent;
  • monitoring in fixed income was less sophisticated than in equity trading but some firms had been proactive in seeking to meet their obligations;
  • some compliance staff lacked access to relevant data and were not supported by senior management in a way that enabled them to challenge the front office.

The FCA expects all firms to have a strategy to ensure they are compliant with best execution. There should also be clear management responsibility and co-ordination between front office and compliance to ensure effective oversight. Firms also need to be aware of enhancements to best execution monitoring as they become available and to assess the suitability/proportionality of such measures for their business model.

The FCA says that it will be revisiting best execution this year to see what steps investment management firms have taken to assess gaps in their approach and how they can evidence that clients are not paying too much. Where firms are not meeting its expectations, the FCA warns that "appropriate action" will be taken, including "detailed investigations" into firms, individuals and practices. Given the amount of guidance on this topic and the FCA's reference to the failure of most firms to learn lessons or implement the findings of its review, this is unlikely to be an empty threat.