Despite delay to the directive, best execution is one target firms should be able to meet by the implementation date
Much has been made of the delay to Mifid II, primarily the admission by the European Commission that aspects of Mifid II require additional systems that cannot realistically be designed, tested and implemented in the short time remaining before the original implementation date.
Best execution is one area within the scope of Mifid II where there is not a dramatic shift compared with existing UK rules and previous FCA guidance.
The requirements have, however, been enhanced and now include more detail on the information to be provided to clients. Firms will have to amend or redesign their monitoring and reporting arrangements as well as re-draft policies and client communication procedures.
Clear communication is key
Regulators, both domestic and international, expect firms to communicate with their clients in a way that is clear, fair and not misleading. Mifid II’s best execution provisions are no exception.
The directive explicitly states that customers should be provided with sufficient detail, tailored to the type of service being undertaken and the class of financial instrument. This must be presented in an easy-to-understand way, so firms need to review their customer communication and consent processes to ensure they are delivering the required level of clarity and detail while ensuring that the structure and communication of complex information is engaging. For example, firms will need to communicate the specific weight they apply to each execution factor, including price and timing, within their Order Execution Policy. This could be done by describing clear scenarios, such as a lower reliance on price, when executing very large orders.
Another key policy change is the requirement for firms to notify clients of any material changes to their order of execution policies or arrangements, which can cover a wide variety of scenarios. Firms will need to ensure they have processes in place to make the necessary changes and ensure these are effectively communicated to each client.
Firms would also be wise to undertake regular independent reviews of the policy and relevant disclosures made to clients to ensure there is adequate oversight and reporting to management.
Following previous concerns that best execution is not consistently delivered to all clients, the enhanced monitoring and reporting requirements of Mifid II are likely to be a key focus of the FCA post implementation.
The regulator’s thematic work in 2014 found that most firms are not doing enough to deliver best execution through adequate management focus, front-office business practices or supporting controls.
Firms should review existing best execution obligations alongside the enhanced requirements and assess the capability of their monitoring and reporting arrangements in advance of the enforcement of Mifid II. Taking this step now will give them time to make changes and test outcomes. This process should be thoroughly documented to enable firms to demonstrate that best execution is being delivered.
Firms will also be required to publish annually the top five trading venues for each asset class and the quality of execution obtained. To comply with this, a significant amount of data is required to maintain accuracy.
Firms should therefore review data collection processes to ensure the right information is available and should begin capturing it, especially as there has so far been no indication that a transition period will be granted to allow time for this.
The changes surrounding best execution will affect firms’ policies, systems, data and staff training.
The longer a firm delays, the less likely it is to achieve full compliance by the implementation date. It is imperative that firms do not lose sight of the importance of being fully prepared for Mifid II.
Chris Martin is associate director at the Consulting Consortium.