The Central Bank of Ireland today sent a “Dear CEO” letter regarding the results of a recent thematic inspection of firms’ compliance with the ‘best execution’ requirements set out in the European Union’s Market in Financial Instruments Directive (MiFID II).

In line with the requirements, investment firms must take sufficient steps to obtain the best possible outcome for their clients when executing orders. Where the best execution process is not robust from initial offer, right through to the reporting phase, there is a risk that investment firms may not obtain the best possible result for their clients. This could result in negative outcomes for clients, including less desirable prices, higher costs, and a less favourable return on clients’ investments.

The main purpose of the inspection was to assess the design, implementation and operating effectiveness of the firms’ best execution frameworks. The key areas in focus were the governance processes, including oversight and monitoring processes; policies and procedures; reporting and record keeping.

The inspection has revealed a set of problems. The overarching issue is firms’ failure to demonstrate effective oversight, monitoring and assurance of how best execution requirements were fulfilled. The root cause in many cases related to the lack of resources in compliance functions.

The inspection found that best execution frameworks are at varying stages of development. The firms with less developed frameworks contributed significantly to the identified poor practices and in many instances non-compliance with best execution requirements. This included a failure by firms to:

• review best execution policies on an annual basis or where material changes occur as required by MiFID II;
• have record keeping policies in place as required by MiFID II which in turn contributed to poor record keeping practices; and
• comply with RTS28 reporting as also required by MiFID II.

The inspection also observed a lack of awareness of best execution policies and procedures amongst some staff that, in many cases, resulted from little or no best execution training.

The inspection found insufficient governance around best execution monitoring. This included:

• a lack of clear decision-making processes and governance around adjustments to controls to record and monitor live prices for best execution; and
• a lack of documented formal monitoring processes in place to oversee the quality of service provided by execution providers.

The inspection also observed that compliance monitoring plans around best execution often lacked detail and, in some cases, were treated as ‘tick-box’ exercises.

The inspection highlighted a lack of independent reviews conducted by Internal Audit (or similar assurance testing program) of the end-to-end best execution process. Although a number of internal audit functions performed audits of elements of the best execution process, the end-to-end process was not audited. Where firms did not have internal audit functions, the inspection observed limited assurance testing being completed.

The Central Bank is concerned that this is indicative of a general trend in the MiFID sector, and notes similarities to findings in the thematic inspection of appropriateness, particularly ‘firms failed to provide evidence that they are paying sufficient attention to the application of the appropriateness requirements’ and the use of a ‘tick- box’ approach to compliance.

The Central Bank requires its letter to be discussed at the next Board meeting of the firms, and for the discussion to be recorded in the meeting minutes.

The regulator says it will have regard to the contents of its letter when conducting future supervisory engagement.