FCA to continue firm visits dedicated to payment for order flow checks

Maria Nikolova

Nearly all of the brokers the FCA has visited have now stopped charging PFOF where they consider themselves as acting in an agency-like capacity.

The UK Financial Conduct Authority (FCA) has published an update on its work regarding Payment for Order Flow (PFOF), indicating it will continue to monitor firms to check about possible PFOF arrangements.

Let’s recall that Payment for Order Flow (PFOF) occurs when an investment firm (typically a broker) that executes orders on behalf of its client receives a fee/commission from the client that originates the order, as well as from the counterparty the trade is then executed with (typically a market maker or other liquidity provider). These payments result in a conflict of interest between the firm and its client by incentivising the firm to execute its client orders with counterparties willing to pay the highest commission and so undermine the firm’s ability to act as a good agent.

In December 2017, the UK regulator published a “Dear CEO letter”, underlining its position on PFOF. The letter also set out the FCA’s expectations on the practice in the context of MiFID II, particularly its strengthened conflicts of interest regime.

Subsequently, the FCA Business Plan 2018/2019 outlined supervisory work on PFOF as one of the FCA’s priorities to address conflicts of interest in the wholesale sector. The FCA said this work would focus on ensuring that firms are complying with the strengthened standards in MiFID II.

Before the implementation of MiFID II, the FCA found that most firms had stopped charging PFOF for retail and professional client business. However, market intelligence suggested that some firms were still charging PFOF for ECP business. Intelligence also suggested that some brokers were considering various avoidance tactics so they could continue to charge PFOF after MiFID II implementation. This was the context for the ‘Dear CEO’ letter on PFOF in December last year.

As a result, the FCA current supervisory work has focused on PFOF charged by firms for ECP business, following the implementation of MiFID II.

The FCA supervisory work to date suggests that there have been several developments in the market since January 2018.

Nearly all of the brokers the FCA has visited have now stopped charging PFOF where they consider themselves as acting in an agency-like capacity, regardless of the client’s categorisation.

Many of the brokers the FCA has visited still charge both sides of a transaction for what they characterise as interdealer-broking business, where they do not consider themselves to be acting in an agency capacity. These instances are now the vast majority of transactions where brokers charge both sides of a transaction. The regulator is currently gathering more information about brokers’ activities for this type of business. This is set to enable the FCA to assess whether firms are applying consistent judgements across the market that align with the rules on managing conflicts of interest.

The regulator has also identified isolated evidence of behaviour, in the context of providing an agency-like service to clients, whereby a broker seeking liquidity from liquidity providers has been wrongly defined as a service to those counterparties, with a corresponding charge being levied on the liquidity provider. The FCA will take action against firms who characterise their relationship with liquidity providers in a way that does not reflect economic reality and which are PFOF arrangements.

Furthermore, the FCA has received reports of some brokers booking transactions to overseas offices so they could argue that they were allowed to charge PFOF. The regulator says it will continue to examine brokers’ order routing to overseas entities for any evidence of circumventing behaviour that breaches the FCA rules; for instance, when relevant orders are handled at any stage by a UK broker but are subject to two-sided charging contrary to the FCA PFOF position.

The FCA will continue its program of firm visits. These will evaluate how robust firms’ systems and controls are for monitoring adherence to all relevant rules, policies and procedures on PFOF. Firms should note that, for a given transaction, they should analyse the capacity in which they and the different counterparties involved act, rather than look to their or these counterparties’ general business models.

The UK regulator notes that its work will include scrutiny of the specific controls for correctly classifying individual transactions, such as what a firm classifies as interdealer broking activities. The FCA will also look at the policies applied by firms, focusing particularly on how they manage potential conflicts, and the extent of their compliance monitoring and oversight activity.

Read this next

Digital Assets

Sam Bankman-Fried might see his 25-year sentence halved

Sam Bankman-Fried, the founder of the failed cryptocurrency exchange FTX, was sentenced to 25 years in federal prison by a Manhattan court on Thursday. This comes after he was convicted of defrauding customers and investors, with Judge Lewis Kaplan highlighting the potential future risks posed by Bankman-Fried.

Technical Analysis

EURJPY Technical Analysis Report 28 March, 2024

EURJPY currency pair under the bearish pressure after the pair reversed down from the major resistance level 164.25, which also stopped the sharp weekly uptrend at the end of last year,

Digital Assets

BlockDAG’s Presale Hits $9.9M, MultiversX & MINA Price Predictions Show Green

Read about BlockDAG’s promising $10 prediction and insights on MultiversX Price Prediction as MINA’s potential unfolds.

Digital Assets

Rockstar Co-Founder and All-star Line Up Join Advisory Board to Take Metacade into Post Beta Orbit

Metacade, the revolutionary Web3 gaming platform, prepares to streak out of beta with a slew of ground-breaking initiatives that will redefine the way blockchain games are developed.

Retail FX

Prop firm The Funded Trader shuts down, claims relaunch in April

Prop trading firm The Funded Trader has ceased all operations, with claims for a relaunch in the near future.

Digital Assets

Ethereum-Based Tokenized Real Estate Platform USP Launches On Republic

How This Californian Startup Is Revolutionizing Real Estate Investment through Ethereum-Based Tokenization.

Digital Assets

Sui Spikes in Weekly DEX Volume, Joins Top 10 of All Blockchains

March DEX volume on Sui stands at over $2.88B – up more than 49% from February – with decentralized exchange Cetus and wholesale liquidity layer DeepBook leading.

Digital Assets

Prisma Finance suffers $10 million crypto exploit, attack ongoing

Liquid staking protocol Prisma Finance fell victim to a security exploit on March 28, resulting in nearly $10 million in Prisma mkUSD and wrapped stETH being stolen by hackers.

Digital Assets

Masa and LayerZero: Bridging Blockchains for Data Sovereignty

Masa Network is poised to revolutionize the personal data landscape with its upcoming launch as a cross-chain platform, making it accessible on a variety of blockchains right from the start.

<