A peer review by the European Securities and Markets Authority (ESMA) found that implementation by national regulators on provisions for “best execution”, MiFID’s requirement for investment firms to act in their clients’ best interests, is “relatively low”.
Effective from November 2007, MiFID is a European Union law that aims to provide harmonised regulation for investment services across the 31 EU member states.
ESMA said best execution is currently an unmonitored, mis-understood, component of business conduct, and is usually viewed only in terms of best price.
It added that the absence of a general standard of advice across European was making it difficult for national regulators to comprehensively understand best execution.
It identified several solutions to the problem, including:
- Prioritisation of best execution as a key conduct of business supervisory issues,
- The allocation of sufficient resources to best execution supervision; and
- A more proactive supervisory approach to monitoring compliance with best execution requirements, both desk-based and onsite inspections.
Steven Maijoor, ESMA chair, said the standards of supervision to ensure best execution have not ensured that retail investors receive the best income when trading securities.
He put this down to differing views on the application of the best execution requirements, lack of supervisory focus, insufficient resources and market structure issues.
ESMA is currently working to implement the legislation of MiFID’s successor, MiFID II, into rules and regulations.
MiFID II, which will not be fully implemented until 2016, aims to address the residual effects of the financial crisis by improving financial market transparency and strengthening investor protection within the insurance and investment market.
Its proposals include:
Limitations on the receipt of commissions.
- An enforcement of the clear distinction between independent and non-independent advice.
- Requirements to include risk identification in the manufacture and distribution of financial products.
- Powers for regulators to prohibit or restrict the marketing and distribution of certain financial instruments.
- Requirements to provide clients with details of all charges related to their investment.
ESMA is an independent EU authority established in 2011 which aims to enhance the protection of investors and promote stable and well-functioning financial markets.
