On 25 February 2015, The European Securities and Markets Authority (ESMA) issued a “peer review report”2 (“Report”) examining how national competent authorities (“NCAs”) supervise and enforce the MiFID provisions relating to investment firms’ obligation to provide best execution or to obtain the best possible result for their clients when executing their orders.
This review covered the period from 1 January 2011 to 31 December 2012 across 29 jurisdictions and was supplemented by on-site visits to NCAs of Luxembourg (CSSF), Liechtenstein (FMA), France (AMF), Spain (CNMV), Poland (KNF) and Malta (MFSA).
ESMA concluded that, due to a number of factors, the level of implementation of best execution provisions as well as the level of convergence of supervisory practices by NCAs is relatively low.
In that respect Mr. Steven Maijoor, ESMA Chair, commented as following:
“The overall findings in this report show that the standard of supervision to ensure the implementation of MiFID’s best execution requirements falls short of its aim of ensuring that retail investors receive the best outcome when trading securities. A number of factors, including differing views on the application of the best execution requirements, lack of supervisory focus, insufficient resources and market structure issues have contributed to the current situation.”
“It is important that this situation is addressed in the interests of Europe’s investors.”
Key Findings of the Report are
- oversight of best execution is usually a component of the supervision of general conduct of business issues and is often limited to verifying if an execution policy exists rather than assessing the methods by which firms evaluate execution quality;
- best execution is often viewed in terms of best price; other characteristics such as cost, speed, likelihood of execution and settlement, and order size received limited attention;
- execution venues tend to be highly concentrated in the main domestic market, with a low level of development of alternative venues;
- the absence of a European consolidated tape makes it difficult for NCAs to develop a comprehensive oversight of what constitutes best execution across all venues;
- monitoring of best execution of non-equity and less liquid markets is (largely) absent; and
- a lack of understanding amongst investors may explain the low rate of complaints on this topic which in turn has resulted in few enforcement actions on the issue.
Recommendations for future work
In response, ESMA identified a number of areas for future work by itself and NCAs that could promote a more coherent cross-EU implementation, supervision and enforcement of the best execution rules, as following:
- providing guidance for the national implementation of MiFID rules to ensure a common understanding of the best execution rules;
- assessing the adequacy of NCAs resources devoted to best execution supervision and the frequency and intensity of their active monitoring of best execution;
- providing guidance to help NCAs developing the assessment criteria to be used when firms use only one execution venue for a particular type of financial instrument;
- assessing whether obstacles exist to developing alternative execution venues;
- examining the use of sanctions to ensure a credible deterrent against breaches; and
- developing specific consumer education programmes.