Best execution – are you doing enough?

25 June 2018

How asset managers, as agents of their underlying investors, control costs incurred by investors in their products has been at the very top of the Financial Conduct Authority’s (FCA) agenda for a number of years.

Control of transaction costs (both explicit and implicit) therefore, is a central tenet of this ongoing work, alongside use of dealing commissions, payment for research, value for money assessments, etc. Complying with the best execution obligation is one way in which asset managers can ensure that they are controlling costs and delivering good value for investors.

The FCA indicated in March 2017 that best execution remains an issue in the asset management sector. The FCA stated that many firms had failed to update their practices following the FCA’s identification of wide-spread failings throughout the financial services industry after its thematic review on best execution in 2014. 

In light of the recent global LIBOR and FX issues, regulators are very much turning their attention to fixed income and OTC markets. Best execution is no exception here, with the FCA’s recent pronouncement in 2017 highlighting the lack of sophistication in best execution monitoring for the fixed income and OTC markets.

MiFID II enhanced the best execution standard from requiring firms to take “all reasonable steps” to obtain best execution, to requiring them to take “all sufficient steps”. This in effect raises the bar in relation to the pre- and post-trade monitoring of best execution expected of firms.

Given the FCA’s ongoing concerns about best execution compliance within the asset management sector, the regulatory focus on fixed income and OTC markets and the recent implementation of MiFID II, we expect that the FCA will conduct supervisory work with firms in relation to best execution in the next year.

In advance of any such supervisory work, firms would be well-advised to conduct a post-MiFID II implementation review of their best execution practices. We set out below a summary of the findings of the FCA arising from its 2014 thematic review in relation to monitoring, accountability and governance of best execution arrangements. We also provide some questions which asset management firms may find useful when performing a post-implementation review. 


Summary of FCA findings:

  • Most firms lacked effective monitoring capability to identify best execution failures and / or poor client outcomes
  • Lack of effective review and challenge of front office monitoring activities by the second line of defence (Compliance)
  • Monitoring efforts did not cover all relevant asset classes, reflect all of the execution factors or include adequate sample sizes

In light of these findings, firms may find the following questions helpful as a prompt for areas to consider when conducting a post-MiFID II implementation review:

Front office monitoring

  • What pre-trade monitoring is conducted by the front office to assist with broker / venue selection?
  • How does post-trade monitoring by the front office help with evaluating the performance actually achieved for investors?
  • How can you demonstrate that your best execution monitoring is capable of identifying best execution failures or poor investor outcomes?
  • Has your best execution monitoring ever identified best execution failures or poor investor outcomes and, if so, how did you respond?
  • Have changes ever been made to your execution arrangements to address issues arising out of your monitoring activities
  • Are your monitoring activities supported by management oversight and governance to help drive consistent delivery of best execution?
  • Does your compliance review of best execution constitute an effective independent challenge to the front office?
  • How can you demonstrate that compliance oversight of best execution adds value to delivering best execution?
  • Does Compliance challenge conclusions reached by the front office in relation to best execution arrangements?
  • How does front office monitoring (real time, end-of-day and periodic) feed into management information?
  • Can you demonstrate how best execution issues arising from real time front office monitoring are escalated?

Venue and broker selection

  • Do you have a well-developed process for assessing the execution venues and brokers used on a periodic basis, including (as relevant) liquidity, toxicity and reversion analysis?
  • Do you have a robust process for on-boarding new brokers and venues based on an assessment against objective criteria, e.g. market share, tenure and breadth of market coverage?

Second line of defence challenge

  • Does the Compliance department have the requisite skills to assess the best execution data?
  • Do Compliance staff understand the rules and expectations relating to best execution?
  • Is Compliance adequately equipped to challenge the conclusions reached by the execution desks?
  • Are explanations given by the front office accepted at face value by Compliance?
  • Are there examples where Compliance monitoring has identified best execution failures or weaknesses?
  • Are Compliance processes focussed on confirming that internal processes have been followed or do they effectively challenge whether best execution has been achieved?

Scope and scale of monitoring

  • Does monitoring cover all relevant asset classes, not just cash equities?
  • Does monitoring cover all relevant execution factors (e.g. cost and timeliness of execution)?
  • Is monitoring conducted on a sufficient sample size in comparison to the firm’s scale of activities?
  • Where sampling is used, can the firm justify why this is a proportionate approach?

Use of benchmarks and tolerance setting

  • Are you able to explain why the firm uses a particular benchmark in your monitoring programme?
  • How frequently is the use of benchmarks reviewed? By whom?
  • How are tolerances away from benchmarks set? How frequently are these reviewed? By whom?
  • Are tolerances appropriately set?


Summary of FCA findings:

  • Lack of clarity in relation to who has responsibility and ultimate accountability for ensuring that execution arrangements and policies met regulatory requirements
  • Lack of front office involvement in policy reviews
  • Policy reviews focussed on process rather than delivering client outcomes

The following questions may be helpful in conducting a review of your best execution arrangements:

Ownership of responsibility for delivering best execution

  • Is the ownership of the execution arrangements and policies clear?
  • Can you demonstrate substantive review of your order execution arrangements and policies in line with the FCA’s requirements?
  • Where does ownership of best execution monitoring lie? Front office or Compliance?
  • Does practice accord with written policies and procedures?
  • How frequently are staff trained on execution procedures?
  • Are the different checks and processes which make up your best execution monitoring framework related to each other (or are they conducted in unrelated silos)?

Review of best execution arrangements

  • Does the firm have well-defined and formal review processes for order execution arrangements?
  • Do such reviews draw on relevant expertise from across the business?
  • Can you demonstrate that the review process has resulted in formal actions being taken to change execution practices?
  • Is there a clear audit trail of revisions to arrangements, including documentation and subsequent approval?
  • Does the firm conduct a review process at least annually and whenever a material change happens that affects the firm’s ability to deliver best execution on a consistent basis?


While the FCA does not comment on governance in relation to the arrangements for best execution in place in the thematic review, firms should consider whether the governance arrangements in place (which ultimately impact the ability of individuals with ultimate responsibility to discharge those responsibilities adequately) are fit for purpose and challenge to the best execution processes is demonstrable.

Some questions which firms could ask when benchmarking their current processes:

  • Which governance bodies have responsibility for oversight of the best execution arrangements in place within the firm?
  • Are best execution policies and arrangements approved by senior management?
  • Is the management information provided to those governance bodies fit for purpose and does it enable those bodies to effectively challenge the processes in place?
  • Do the minutes for the relevant governance bodies demonstrate that there is effective challenge and oversight?

The financial services regulation team at Macfarlanes has extensive experience of advising clients in relation to best execution issues, including preparation for supervisory and enforcement visits. We would be delighted to speak to you about conducting a review of your best execution arrangements and our in-depth knowledge of the expectations of the FCA in this area.