On 12 December, the Financial Conduct Authority (FCA) published findings from its multi-firm review of how wholesale banks deliver best execution in UK listed cash equities.

Background

The FCA explained that it had last carried out a thematic review (TR14/13) of wholesale banks’ best execution practices in 2014 and that, in the context of regulation, the Markets in Financial Instruments Directive (MiFID II), which came into force in 2018, has extended the best execution rules and regulatory framework for SIs in equities.

Key findings

The FCA highlighted key findings from this review, including:

• Scope: The FCA received feedback that assessing the scope of best execution obligations in quote-driven wholesale markets, where firms deal on their own account, can be complex, so it will consider this in any future review of our best execution rules. However, in terms of areas for improvement the FCA highlighted that in quote-driven markets, it found some banks inflexible in their best execution framework, but reminded firms that their frameworks should be flexible enough to ensure best execution is applied and evidenced. The FCA reminded firms that they should examine how and when they undertake reviews against their execution outcomes, using a flexible framework allowing easy adaption to market and client activity changes. 

• Governance and oversight: The FCA found areas for improvement in relation to committee scrutiny, challenge from compliance, the use of framework testing and insufficient data and evidence. The FCA found that at most banks, compliance typically focused on challenging processes rather than actual outcomes, but that it found examples of stronger and effective challenge at banks which had empowered compliance functions, supporting them with the right data and tools, and ensuring their voice was heard at all forums. The FCA also emphasised that banks should fully assessed how effectively their frameworks would operate under varying market conditions and ensure their arrangements are sufficiently tailored to all relevant asset classes so they can demonstrate their delivery of best execution across a range of market conditions and product types.  

• Monitoring and management information: The FCA made clear that it did not observe the same monitoring issues that were reported in the 2014 review and that in most cases, banks had well-established processes in place that covered a range of execution factors and enabled them to identify both good and bad outcomes. However, the FCA also highlighted some areas for improvement, for example in relation to how the results of the real-time and post-trade monitoring are reported to senior management decision-making forums at some banks.

• Managing conflicts of interest when internalising order flow: The FCA set out that as operating as a systematic internaliser allows a firm to internalise order flow by matching client orders against its own book it considers that this can create a potential conflict of interest between the firm’s obligation to provide best execution and its incentive to reduce execution costs and capture market share through internalisation. However, it further explained that as internalisation does not automatically guarantee the best execution outcome firms must consider all appropriate execution venues and route orders where they can get the best possible outcome.

Next steps

The FCA set out that it will continue discussions with wholesale banks on their approaches to best execution and that if it considers that proposing rule changes is appropriate, it will consult on those changes in the first half of 2026.