The Financial Conduct Authority (FCA) is considering taking action against banks and brokers after concerns that they were not providing their clients with ‘best execution’.
What is Best Execution?
Under EU and FCA rules, customers are entitled to ‘best execution’ when carrying out financial transactions, such as buying stocks. To achieve this, firms should set out an execution policy, which states their procedures, and this is aimed towards getting the best deal for their client.
The law states that firms don’t have to get the best possible deal for absolutely every single transaction carried out, but they should apply their execution policy to each order with the aim of getting the best possible deal.
Some firms are getting their clients to waive rights to best execution, despite this not being allowed.
The laws regarding best execution apply to a wide range of financial transactions, including:
- Shares and bonds
- Exchange traded derivatives, such as futures and options
- Over the counter derivatives, such as spread betting and contracts for difference
- Foreign exchange trading
How Might a Firm Fail to Provide Best Execution?
One example of failing to provide best execution involves not passing the benefit of a better deal to a client. Here’s an example:
- You place an order to purchase 25000 shares in ABC at 100p (costing £25000)
- Between you placing the order and it being filled, the price of ABC has gone down to 99p (they’re now worth £24750)
- Because the price of the shares has decreased before you’ve been able to complete your purchase of shares in ABC, your broker should have the opportunity to get the shares at the new, cheaper price
- Your order is filled at 100p, and sometimes you may be none the wiser that you could have bought them at the cheaper price, because markets move fast and you can’t see what your broker was actually doing
- The broker was able to get the shares at 99p, but pocketed the penny difference on each share themselves, meaning you’ve lost out on £250
It’s bad enough if this happens once, but if it happens several times, it’s easy to see how you can lose out on a lot of money. If the price had gone up to 101p, we can’t see a bad broker filling your order for 100p and paying the £250 difference out of their own pockets!
As financial markets tend to move at a fast pace with prices going up and down continuously throughout a trading day, sometimes you have to accept that the price may change between the time when you submit the order, and when that order is filled. This may even mean you have to pay more or receive less shares for the money you have available – this is called slippage.
If a broker is pocketing the difference from prices which move in your favour, but leaving you to deal with prices that move against you, this would definitely not be viewed as best execution. Either they fill your transaction at the exact price you ordered each time, or at whatever price they can, regardless of the direction that the prices move.
It may seem like daylight robbery, and you may think that large firms would never do this. However, the FCA have fined some firms for this practice in the past, with one currency broker being fined £4million for withholding profits in an similar way.
If you feel that you’ve unfairly suffered because of how your financial transactions have been carried out, it is worth contacting us for advice on where you stand. 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, meaning it could be worthwhile investigating a little further.