Member States have until 31 May to actively support transparent, efficient, and accessible equity markets for retail investors and submit their written comments to the French Presidency working on the Compromise Proposal for the review of MIFIR regulation.
In order to avoid a poor compromise, national policymakers
should put consumer interests first and remember the European Union’s
Markets in Financial Instruments Directive (MiFID II) requirements for
investment firms to act “honestly, fairly, and professionally in accordance with the best interests of clients”
when providing investment services. MiFID II further stipulates that
the receipt of an “inducement” (commission, rebate, fee or other
monetary benefit) by an investment firm can lead to a situation in which
the firm would not be acting in the best interest of its client.[1]
Payments for retail order flows (PFROF) are a clear example of such
breaches of conduct of business rules reinforcing retail investor
protection. Moreover, PFROF can conflict with best execution
requirements and can lead to worse execution for end investors. Yet
policymakers from EU Member States are poised to reject pro-consumer
proposals by the European Commission, the European Securities and
Markets Authority (ESMA) and BETTER FINANCE[2], to ban the practice of PFOF altogether.
Instead, the Council considers additional disclosures as a solution
for PFOF concerns, which is in BETTER FINANCE’s view yet another blatant
attempt to shift responsibility from providers to non-professional
investors. The trend of essentially requiring “retail” investors to
undertake their own research, engage in highly technical evaluations,
and monitor complex market infrastructures to determine whether their
providers comply with the law needs to be stopped in its tracks. Even
academics, regulatory authorities, and industry players can’t agree on
how to assess best execution, so how can we expect non-professional
traders to do so? After all, investing is not, and should not be, a
full-time job.
To ensure and evaluate “best execution”, “retail” investors need
free, clear and easy access to market data - in essence a consolidated
tape that allows for the ex-post verification of best execution -
allowing investors to verify if orders have been executed in their best
interest. Any trade execution venues handling “retail orders” must abide
to the same transparency and matching rules as regulated markets.
“Dark venues should have a minimum order size threshold that would exclude retail trades,” says Guillaume Prache, Managing Director of BETTER FINANCE. “Otherwise,
consolidation and display of pre- and post-trade data close to real
time will only help dark, freeriding venues to further expand at the
expense of the lit regulated markets. This would lead to the opposite of
the CMU’s goal to foster retail investment into capital markets,
leaving them increasingly in the hands of just professional
intermediaries (“other people’s money”)”.
[1] Save where certain criteria are met.
[2] Transparency and Best Execution for Retail Traders and Investors, BETTER FINANCE Position Paper on Payment for Order Flows, May 2022
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