New ESMA guidance less strict than the established UK position on PFOF.
By Rob Moulton, Axel Schiemann, Thomas Vogel, and Charlotte Collins
On 13 July 2021, ESMA published a statement on payment for order flow (PFOF), the practice of brokers receiving payments from third parties for directing client order flow to these third parties as execution venues.
ESMA warns that the increase in retail client activity in the past year has highlighted the use of PFOF, both in the US and in some EU jurisdictions. ESMA explains that PFOF causes an inherent conflict of interest, as it incentivises brokers to choose the execution venue offering the highest payment, rather than the venue that will achieve the best outcome for the brokers’ clients.
Therefore, ESMA is of the view that, in most cases, the receipt of PFOF is unlikely to be compatible with MiFID II. ESMA requires firms to thoroughly assess whether, by receiving PFOF, they are able to comply with relevant MiFID II requirements, in particular those on best execution, conflicts of interest, inducements, and cost transparency. Interestingly, this contrasts with the stricter UK position. The UK FCA has made clear for many years that the receipt of PFOF is not compatible with firms’ obligations regarding conflicts of interest, inducements, and best execution. This is because the FCA considers that the price quoted by the execution venue will always be influenced by the fact that any profit will be reduced by the PFOF they are paying. Continue Reading