Best execution: the MiFID effect

One of the most significant areas where the European Union’s MiFID Directive will impact on the Conduct of Business procedures of authorised firms is in relation to “best execution”, the obligation on firms to use appropriate endeavours to obtain the best available price for their clients when executing transactions in investments. MiFID will make some changes to the definition of what constitutes best execution, but more importantly, says Scott Cochrane , partner and Dominic Clarke , consultant, both of Herbert Smith, it will extend the categories of transactions and clients to which best execution obligations apply and add new procedural and client reporting obligations with respect to a firm’s best execution policy.

At the time of writing a number of questions remain to be answered as to the exact extent of the new regime. The Directive itself (Level 1 requirements) is in its final form, but the European Commission has yet to publish the final form of its Level 2 implementing provisions, which will expand on some of the requirements in the Directive itself. Those implementing provisions when adopted (probably in the Spring of 2007) will have the force of European law, but at present the Commission has only published working drafts. The FSA has then to issue its own Consultation Paper (end March/April 2006), setting out both how it proposes to incorporate the requirements of the European legislation into its rule book and what additional requirements (if any) it might impose, as well as dealing with policy issues such as whether the MiFID best execution regime should apply to all authorised firms or just those who are “investment firms” within the definition in MiFID. In this article we speculate as to how the FSA may interpret the provisions of the Directive, eg, in relation to the position of firms which deal as principal rather than as agent. It remains to be seen, however, what approach the FSA will decide to take.