What are your Best Execution Obligations?

Leicester City were the champions of the English Premier League in 2016. One of the most unlikely sporting stories of all time. How unlikely? Well, bookmakers gave Leicester odds of 5000-1 to win the title. Were you lucky enough (sorry, able to exercise perfect judgment) to execute a bet at this price?

Some traders also executed a near-perfect and equally unlikely trade in 2020; the impact of the COVID-19 pandemic caused Brent crude oil prices to crash to $9.12 per barrel on April 21, 2020. These barrels cost $70 each at the beginning of the year.

Any trader who predicted this move and backed their judgment secured the best execution prices possible during H1 2020.

Traders love to relay stories of these types of successes, and why shouldn’t they? Oil traders and Leicester City backers achieved the best possible execution price in their chosen field.

But to avoid any misunderstanding, these two scenarios are NOT examples of best execution obligations.

But what is best execution?

Best execution, also known as best ex, refers to investment firm obligations to take all sufficient steps to obtain the best possible result for clients when executing orders. Note that this definition doesn’t even include the word ‘price.’ Best ex is more than an inspired performance on a trading floor.

After a brief history (very brief, I promise), we’ll take a look at your best execution obligations.

A Brief History of Best Execution and Why it Matters

Best ex isn’t a new concept. It’s been around since the MiFID I (Markets in Financial Instruments Directive) was established in 2012. MiFID was and still is the legislation covering financial markets in the EU. It was introduced to ensure protection and increase transparency for retail clients by making it an obligation for orders to be executed on the most favourable terms for them.

Best execution obligations aim to protect retail clients by demystifying the world of trading. Think about how the public viewed bankers and traders after the 2008 financial crash – their trust in the markets completely dropped. Therefore, both the MiFID and the FCA (Financial Conduct Authority) have emphasised the need for ‘transparency.’ They want people to be able to access and put their trust in investing.

Then came the sequel: MiFID II best execution was enacted in 2018, and the FCA made further changes via PS (Policy Statement) 20/21 following Brexit.

Changes to MiFID 1 best execution obligations were necessary because the investment world had evolved. The range of instruments available to retail had expanded. Think about what you place in ISAs or pensions now: it’s not just cash or individual stocks and shares, but also pooled investment funds, unit trusts and investment trusts, exchange traded funds, bonds (government and corporate), bond funds and even commercial property and property funds.

At the time, markets had also expanded, with a proliferation of places to buy and sell financial instruments. Long gone were the days when UK stocks just traded on the London Stock Exchange. A variety of venues had been developed, such as Multi-Lateral Trading Facilities (MTFs), Organised Trading Facilities (OTFs), Systematic Internalises, crossing engines, dark pools, grey lists and lit markets.

This isn’t the article to discuss the nuances of each, but since the establishment of MiFID I, what you could invest in and how traders bought and sold investments changed radically. Therefore, new regulations were needed to strengthen investor protection.

Linking Best Execution Obligations to FCA Principles of Business

Let’s start with the obvious: it’s a regulatory requirement for firms to monitor best ex and trading governance to achieve it. But if you think the responsibility sits solely with compliance, you’d be wrong.

Best ex isn’t a stand-alone policy. The FCA wants firms to link it to its Principles of Business. To give examples of these:

• • Principle 6, Customers’ Interests (Treating customers fairly, the code of conduct): ‘A firm must pay due regard to the interests of customers and treat them fairly.’

• • Principle 8, Conflicts of Interest: ‘A firm must manage conflicts of interest fairly, both between itself and its customers, and between a customer and another client.’

• • Principle 12 (released in July 2023) Consumer Duty: ‘A firm must act to deliver good outcomes for retail customers’.

These are well-defined standards of consumer protection across financial services. The requirement for firms to put customers’ needs first is at the heart of the regulation of capital markets. The above principles aren’t suggestions, they’re obligations.

There is a requirement to make best execution accessible to your current and potential clients. It must be up to date on your website and in a durable medium, so it should also be in your terms of business.

If you’re not sure where to find your best execution policy, now might be a good time to find out.

What Does “Best Possible Result” Mean?

The FCA does not have an exact definition for “best possible result”, so firms have some flexibility. The regulator does however expect a definition appropriate to your clients based on:

• • Execution factors

• • Client characteristics and objectives (what they want you to achieve)

• • Order and instrument characteristics

The key here is consistency. For example, ‘execution factors’ include the venues used to execute orders. Does the firm prioritise venues that provide anonymity, low cost or speed? You need to provide clients with a list of venues on which the firm places significant reliance. If you are consistent, the FCA will be far more understanding of the amount of time or which venue is used on each order. Likewise, you must be consistent by instrument (asset class) and order type.

One policy for all asset classes is a definite no. The fixed income, foreign exchange and equity markets do not trade the same way, and your best ex policy must reflect the nuances of the asset class. You need to think about your client type and the service you provide and then design policies and procedures that are relevant.

Best ex obligations vary depending on your firm type. Whether you’re a UCITS, a private client broker offering customized managed accounts, an AIFM or a CFD provider offering advisory or execution-only, the rules are broadly the same, but there are differences in emphasis. Check COBs 11.2a for your firm’s exact obligations.

Going back to the definition of best ex, let’s focus on the word highlighted in green:

 ‘The obligation an investment firm has to take all sufficient steps when executing client orders, to obtain the best possible result for the client.’

When best ex moved from MiFID to the FCA, the word ‘sufficient’ replaced ‘reasonable,’ as ‘reasonable’ was considered too subjective. We all feel like we’re being ‘reasonable’ in a debate or argument. ‘Sufficient’ is far more prescriptive.

This means that a firm must have a process to achieve FCA best execution, monitor and report it. Firms now need to show they have updated their processes, and the process is under constant review. Is your firm (compliance) monitoring? Have they made it a living process? For example, if price and cost are the most principal factors for a retail client, then you should arrange your process so that price and cost are priorities when trading. Your monitoring programme must focus on whether the best price and cost were achieved.

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🔶 This article is written by ZISHI experts and published in the May 2025 edition of Advice Matters Magazine. Subscribe here to stay up to speed with the latest regulatory policies and procedures.

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