A watchdog has warned that it could take action against banks and brokers who break European Union laws by failing to give customers the best deals.
The Financial Conduct Authority (FCA) checked whether 32 banks, brokers, wealth managers and interdealer brokers had complied with an EU law that requires them to take “all reasonable steps” to get the best possible deal when executing orders on behalf of customers.
Assessment of transactions in the EU’s biggest securities market involves not only price, but also speed of execution, size of order and exchange and clearing costs.
“Firms told us that best execution is a simple commercial imperative - yet our review shows many firms unacceptably fail to put their clients’ interests first, undermining market integrity and inhibiting competition,” David Lawton, the FCA’s director of markets, said in a statement.
“We will require firms to take immediate action to address all relevant areas of our findings.”
Best execution applies to trades in stocks, bonds, foreign exchange, contracts-for-difference, exchange-traded-funds and other securities.
All the firms that were reviewed failed to show that traders had a consistent understanding of what best execution actually means.
Some firms used “carve-outs”, or agreements in which customers allow firms to opt out of rules, which are not allowed.
The FCA said every basis point saved in all trading by all market participants could translate into £264m in additional returns for customers a year.
The review found that firms, rather than trying to apply the rules properly, assumed customers would simply switch to a rival if they were unhappy.
Among other practices, the watchdog wants to crack down on so-called payment for orders, when the broker gets a commission not only from the customer but also from the trading venue on which the order is executed. This is a double charge which is seen as a conflict of interest. The review found that four firms attempted to evade the rules by changing the description of services they offered so that they could continue to get paid for order flow.
“The firms we reviewed have ceased this practice, and the FCA will take action against any firm where it continues,” the watchdog said.
The watchdog warned in its regular newsletter in February that parts of some markets, such as foreign exchange and spread-betters, should be aware that they, along with stock markets, come under the best execution law.
The FCA fined retail currency broker FXCM £4m in February for withholding profits worth about £6m from being passed on to UK customers under best execution rules.
A British Bankers’ Association spokesman said: “Banks take their responsibility for giving customers the best deal based on fair and transparent information very seriously. That’s why we support the FCA’s new conduct guidelines and are working with the regulator as it undertakes its review of competition in wholesale markets.”
Ian Cornwall, Director of Regulation, at the Wealth Management Association, said yesterday: “The FCA’s press release does not specifically highlight issues by sector.
“We will be discussing the nature and scope of the work conducted within the wealth management sector with the FCA to identify any key issues for our member firms.”
The FCA, which was established last year, regulates the financial services industry to ensure firms stick to the rules and consumers don’t fall victim to scams or get tied in to unfair contracts.