Thematic inspection on best execution

Summary

The Central Bank of Ireland has published the findings of its thematic review of investment firms’ compliance with the MiFID Best Execution requirements for consumers. The Central Bank has found that some firms failed to demonstrate effective oversight, monitoring, and assurance of how Best Execution requirements were fulfilled. Irish investment firms are required to discuss the findings at their next board meeting and to record the discussion in the minutes.

Background

MiFID2 requires investment firms to take sufficient steps in order to obtain the best possible outcome for their clients when executing orders, taking into account price, costs, speed, likelihood of execution and settlement, size, nature and any other consideration relevant to the execution of the order. The Best Execution requirements are a critical part of MiFID2’s investor protection framework.

The Central Bank Thematic Review

The Central Bank recently carried out a thematic inspection of Irish firms’ compliance with their Best Execution obligations and has now issued its findings, which are:

• The overarching issue identified was a failure by firms to demonstrate effective oversight, monitoring and assurance of how best execution requirements were fulfilled. The Central Bank state that in many cases this was caused by a lack of resources in compliance functions.

• Best Execution Framework: In many cases, the Central Bank observed a failure by firms to

  • review Best Execution policies on an annual basis or in response to regulatory developments;
  • have record keeping policies in place; and
  • comply with the relevant Level 2 reporting requirements.

  In addition, the Central Bank observed a lack of training, resulting in poor awareness among staff of their firm's Best Execution policies and procedures.

• Governance: Significant shortcomings were identified in Best Execution governance, including a lack of clear decision-making processes and evidence of Board and/or committee oversight and challenge, with the Risk Function having limited involvement. In particular and in common with previous inspections, the Central Bank observed a tick-the-box approach to compliance.

• Assurance Testing: Lack of independent reviews of the end-to-end Best Execution process and limited assurance testing being completed. The Central Bank observes that a failure to carry out independent testing can lead to weaknesses, gaps, or consumer risks inherent in the firm's processes and controls going unnoticed.

The Central Bank's concern is that the findings are indicative of a general trend in the MiFID sector in Ireland and refers to similar findings in its thematic review of the determination of appropriateness.

Finally, the Central Bank has included useful examples of good and bad practices which it observed during the inspection, broken into subjects such as governance, recordkeeping and reporting. These can be used when carrying out a gap analysis against the Central Bank's supervisory expectations.

Conclusion

The Central Bank states that the findings do not reflect the consumer-focussed culture that it expects to see in place. As with previous reviews, such as that on outsourcing, the Central Bank is concerned by the lack of awareness and oversight at board level, and the failure to ensure that adequate and up to date procedures are in place. Firms are required to discuss the letter at their next board meeting and to record the discussion in the minutes. The Central Bank will refer to the contents of the letter when conducting future supervisory engagement

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