The Central Bank of Ireland recently undertook a thematic inspection to review firms’ compliance with the ‘best execution’ requirements as set out in the European Union’s Market in Financial Instruments Directive (MiFID II). The best execution requirements play a critical role in the investor protection framework and are fundamental to the delivery of positive outcomes for clients. This work is a key part of the Central Bank’s ongoing strategy in the MiFID sector, as it seeks to ensure firms operate in the best interests of their clients and provide the highest levels of investor protection.
In line with the requirements, investment firms must take sufficient steps to obtain the best possible outcome for their clients when executing orders. Where the best execution process is not robust from initial offer, right through to the reporting phase, there is a risk that investment firms may not obtain the best possible result for their clients. This could result in negative outcomes for clients, including less desirable prices, higher costs, and a less favourable return on clients’ investments.
The primary objective of the inspection was to assess the design, implementation and operating effectiveness of the firms’ best execution frameworks. The key areas in focus were the governance processes, including oversight and monitoring processes; policies and procedures; reporting and record keeping.
The overarching issue identified from this inspection is firms’ failure to demonstrate effective oversight, monitoring and assurance of how best execution requirements were fulfilled. The root cause in many cases related to the lack of resources in compliance functions, which in some cases led to key compliance roles being vacant for prolonged periods and gaps in best execution second line capabilities.
The inspection also identified deficiencies in firms’ best execution frameworks, governance and assurance testing that must be addressed in order to raise investor protection standards across the industry and mitigate the risk of poor outcomes for clients. Notwithstanding these deficiencies, the inspection team did observe examples of good practices across some firms.
The Central Bank requires firms to review and address these findings in the context of their own best execution arrangements in order to mitigate all consumer protection risks.