FCA issues a reminder to brokers on best execution practices

UK regulated brokers can come under more scrutiny due to best execution malpractices

LeapRate has already reported on last week’s long dated fine on FXCM imposed by the UK financial regulatory body FCA. What we would like to emphasize today is that this could be only the first action in a series of investigations. According to the UK regulator’s “Newsletter on market conduct and transaction reporting Issues”, dated from February, the regulator might be onto something.

The FCA reports that it is in the process of undertaking a thematic review of best execution practices across many different markets and adds that some of the companies involved in offering financial services might have misunderstood regulatory requirements.

The document explicitly mentions CFD and spread-betting companies and forex brokers offering Rolling Spot Forex CFDs and reminds them that they are a part of the regulatory scope that engulfs offering best execution to their customers. We are not going to speculate as to which companies might be targeted with these paragraphs, but the list is rather big and the possibility of seeing more action is growing.

We would like to reiterate, that FXCM’s violation of best execution practices that has resulted in a settlement with the FCA, has been conducted until August 2010. With these legacy issues behind, the company is quite safe from further regulatory scrutiny as it has implemented a technological solution that corrected the malpractice several years ago.

According to FCA’s February Newsletter, firms should conduct an execution policy that is receiving and transmitting orders appropriately, and monitor consistently whether or not order execution guarantees the broker’s clients the best execution obligation under MiFID. The regulator proceeds to mention in detail that best execution applies to over-the-counter instruments and retail clients should be able to rely on their broker to protect their interests.

The main issue with best-execution practices is “slippage”- negative price movements between the time of submission of the order by the customer and the time of execution are usually passed onto the customer, however not all companies are passing the positive price movement appropriately. Same malpractice is usually observed in the execution of limit orders that clients place.

According to the statement, the FCA is merely reminding companies of already existing guidance, and it is educational in nature. It seems as if the regulator is giving some leeway to brokers to act on the reminder, as if they know that several industry participants are already conducting malpractices. Time will tell whether or not this rather liberal approach is tied to the fact that the regulator has already too much on its hands with the ongoing forex fixing manipulation investigation.

One conclusion is clear – the regulatory body is not happy with the way orders are executed – otherwise they wouldn’t care to dedicate a full document on their website to the issue.

For the full newsletter issued by the regulator, visit FCA’s website.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.


FCA issues a reminder to brokers on best execution practices


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