On 10 November 2020 the Central Bank of Ireland (the “Central Bank”) released its findings from the recent inspection of MiFID firms’ compliance with best execution requirements in the format of a “Dear CEO Letter” (the “Letter”).
Under Article 27 of the Markets in Financial Instruments Directive 2014/65/EU, investment firms are required to take all sufficient steps to obtain, when executing orders, the best possible result for their clients taking into account price, costs, speed, likelihood of execution and settlement, size, nature and any other relevant consideration. In addition to this requirement, there are various obligations in relation to reporting and governance that apply to MiFID investment firms and their best execution frameworks.
The Central Bank’s recent review focussed on the effectiveness of these best execution frameworks, including the associated governance processes. The Central Bank’s main finding was an overarching failure across firms to demonstrate how they were complying with best execution requirements. Gráinne McEvoy, Director of Consumer Protection at the Central Bank, is quoted in the press release accompanying the publication of the findings as saying:
“The findings of this review do not reflect the consumer-focused culture that the Central Bank expects to see embedded in firms.”
With that in mind, the Central Bank requires all MiFID firms to:
An overall message from the Central Bank is that complying with best execution processes should not amount to a “tick-box” exercise and that the implementation and oversight framework and governance of a firm’s best execution process should involve the Board.
Set out below is more detail on the Central Bank’s key findings and expectations for MiFID firms in respect of best execution frameworks. Importantly, the Central Bank will have regard to the contents of the Letter when conducting future supervisory engagement.
The Central Bank found that the quality of best execution frameworks varies across firms. Good practice and the Central Bank’s expectations for best execution frameworks include the following:
The Central Bank found that that there was insufficient governance around best execution monitoring.
It is expected that MiFID firms will implement the following in relation to best execution:
The Central Bank noted that the Board has responsibility for ensuring that governance structures deliver sufficient oversight and monitoring capabilities at all levels of the organisation.
The Central Bank highlighted that despite auditing elements of the best execution process, many firms failed to audit the end-to-end best execution process, either by an internal audit function or otherwise.
The Central Bank expects firms to have an assurance testing programme in place to review the robustness of their current oversight, monitoring and assurance practices, and to initiate improvements where deficiencies are identified.
The Central Bank also recommends that firms:
The Central Bank requires all firms to consider the contents of the Letter and review their best execution frameworks and processes against its findings and the good practices set out in the Appendix to the Letter. Where gaps/weaknesses are identified, firms are expected to immediately develop and implement actions to mitigate any risk to customers.
As noted above, Firms are required to discuss the Letter at their next Board meeting and to record the discussion in the minutes. The Central Bank will have regard to the contents of the Letter when conducting future supervisory engagement.
Please contact a member of the LK Shields Financial Services team if you have any questions or would like assistance in completing the necessary gap analysis.
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