Handbook Notice 79

Chapter 4 of CP08/7: Quarterly consultation (No 16)
Conduct of Business Sourcebook (Amendment) Instrument 2008 (FSA
2008/36)
Conduct of Business sourcebook (COBS)
4.7 In CP08/7 we set out our proposals to apply the MiFID best execution requirements
to the purchase or sale of units in a regulated collective investment scheme (CIS)
directly from or to the authorised fund manager (AFM) operating that scheme.
4.8 Before MiFID such transactions benefited from an exception 6 to the requirement to
provide clients with best execution. Two sets of firms benefited from this exception:
intermediary firms who passed on client orders to AFMs or executed client orders
with AFMs, and also AFMs operating regulated schemes when dealing with
intermediaries or directly with clients. This exception largely reflected the historical
structure of this market where AFMs were the only venue from which to purchase or
sell units in CIS. Today there are many fund supermarkets, and wrap platforms
intermediaries can transmit orders in these products also.
4.9 MiFID abolished the exception for those intermediary firms within its scope. In
CP07/9 we proposed to extend the MiFID-derived best execution requirements to
non-MiFID scope firms and business thereby removing the exception entirely.
4.10 In practical terms this would require non-MiFID intermediaries (principally financial
advisers), when deciding where to transmit their client orders for units in a regulated
CIS, to consider whether passing an order to an AFM rather than a fund
supermarket or wrap platform would enable them to achieve the best possible result
for their clients. In CP08/7 we stated that since price is not a variable in these
circumstances, a financial adviser must consider the entities it includes in its policy
based on the relative assessment of the costs of passing the order to the different
entities mentioned above.
4.11 AFMs would be affected in that they would also have to consider whether or not
they fall within the scope of the best execution requirements and determine their
approach to compliance. Such an analysis would enable an AFM to conclude that it
was not ‘acting on behalf of a client’ and therefore not subject to best execution. We
stated in CP08/7 that creating a specific exception for AFMs, and not leaving AFMs
to determine the applicability of the requirements to their business arrangements,
would provide greater clarity. However this would run against the general facts and
circumstances analysis based approach to determining best execution.
Responses to consultation
4.12 We received 21 responses to the consultation. Respondents included financial
advisers, authorised fund managers and their trade associations.
6 COB 7.5.4R(1)(b)
Financial Services Authority 17