Investors are missing out on potential returns as those executing their fund managers’ trades are not using the most efficient trading methods, the UK’s Financial Conduct Authority (FCA) has claimed.
Some 36 UK-based firms were asked by the FCA about controlling client costs when executing orders—and many of them did not understand key elements of the rules, the regulator said.
“Many firms unacceptably fail to put their clients’ interests first,” said David Lawton, FCA.“Firms told us that best execution is a simple commercial imperative—yet our review shows many firms unacceptably fail to put their clients’ interests first, undermining market integrity and inhibiting competition,” said David Lawton, FCA director of markets.
The firms included third parties that carried out trades on behalf of asset managers and other private and professional investors.
The regulator said firms must take a range of factors into account, such as price, speed, and order size, to ensure they consistently deliver the best result when executing client orders. However, the FCA found many companies failed to do so due to a range of reasons including poorly or incorrectly applying rules around execution—and even evading rules put in place by the FCA and taking excess payments from clients.
The FCA found most firms were unable to demonstrate how they managed conflicts of interest when using connected parties or internal systems, while most were unable to effectively monitor poor execution or even identify poor client outcomes.
“Overall, many firms we visited appeared to rely on the assumption that clients would switch to a competitor if they were not satisfied that best execution was being consistently delivered to them,” the FCA’s report on its finding said. “Firms should instead be focused on meeting our requirements and exercising their own judgement in their clients’ best interests.”
The FCA said it would be writing to firms to ask for clarification on their practises and seek assurance they would clean up their processes.
“Our findings not only highlight that a failure to obtain best execution on a consistent basis presents a risk of detriment to individual clients, but that it also presents risks to trust and confidence in the integrity of our markets as well as potentially undermining competition between trading venues,” the report concluded.
The full review document can be found on the FCA’s website.
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