Investment firms must ensure they are taking all necessary steps to deliver the best possible outcome for consumers

• Central Bank publishes findings of Thematic Review of investment firms’ compliance with ‘Best Execution’ requirements for consumers.
• Under MiFID regulations, Best Execution requires investment firms to take sufficient steps in order to obtain the best possible outcome for consumers.
• Some firms failed to demonstrate effective oversight, monitoring, and assurance of how Best Execution requirements were fulfilled.

The Central Bank has today (10 November 2020) published the outcome of a Thematic Review of compliance by MiFID-authorised investment firms with the MiFID ‘Best Execution’ requirements for consumers (PDF 313.46KB). Best Execution requires investment firms to take sufficient steps in order to obtain the best possible outcome for consumers, taking into account factors such as price, costs, speed, likelihood of execution and settlement, size, nature and any other consideration relevant to the execution of the order. The requirements play a critical role in the investor protection framework and are fundamental to the delivery of positive outcomes for clients.

The Review found that some firms could not demonstrate effective oversight and monitoring of how their Best Execution requirements were being fulfilled. The Central Bank is particularly concerned at the lack of evidence of Board and/or committee oversight and challenge in the Best Execution process. It is also concerned that some staff demonstrated poor awareness of their firm’s Best Execution policies and procedures, as this may lead to a failure to deliver the best possible outcome for consumers.

The main findings of the Review are:

• Governance: Significant shortcomings were identified in Best Execution governance, including a lack of clear decision-making processes and evidence of Board and/or committee oversight and challenge, with the Risk Function having limited involvement.
• Best Execution Framework: Firms were unable to provide evidence that Best Execution frameworks were reviewed on a regular basis and in response to regulatory developments. This included a lack of training for staff, resulting in poor awareness of Best Execution policies and procedures.
• Assurance Testing: Lack of independent reviews of the end-to-end Best Execution process and limited assurance testing being completed.

In many cases, the root cause stemmed from a lack of investment in 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 Central Bank is concerned that this is indicative of a general trend in the MiFID sector. It notes similarities to findings of the recent Thematic Review of firms’ compliance with their legal requirements to determine whether a product is appropriate for consumers (PDF 111.73KB), where a ‘tick-box’ approach to compliance was prevalent in MiFID firms.

The Central Bank has engaged directly with those firms where issues have been identified.

Director of Consumer Protection Gráinne McEvoy said -

‘If consumers are to have confidence when using the services of investment firms, it must be evident that their outcomes and best interests are central to the firm’s business model and strategies. The Best Execution requirements under MiFID play a critical role in ensuring that consumers are protected as they oblige firms to take all sufficient steps to obtain the best possible result for their customers. The findings of this Review do not reflect the consumer-focused culture that the Central Bank expects to see embedded in firms.’

‘The Central Bank expects all firms to be proactive and meticulous in ensuring they adhere to their consumer protection obligations under the law. We have engaged directly with those firms where issues have been identified and expect all firms to have close regard to the findings detailed in today’s letter. Consumer-focused cultures must be evident throughout a firm’s structure, from robust oversight and challenge by Board and/or committee to comprehensive training for staff. This is vital to enable consumers to make confident, secure choices when availing of investment services.’

Notes

The Markets in Financial Instruments Directive (MiFID II) governs the provision of investment services in financial instruments. It applies to investment firms, wealth managers, broker dealers, product manufacturers, and credit institutions authorised to carry out MiFID activities.

Thematic reviews are used to identify adverse practices, trends and to facilitate the issue of further guidance or direction to industry in addition to initial remedial action against non-compliant firms.

Thematic Reviews include:

• On-site Reviews
• Desk-based reviews
• Continued supervisory engagement.