Best Execution and Beyond: What’s Happening to RTS 27 & 28 Post-Brexit?

Dougie Moffat, New Business Executive

The Brexit transition period has now ended, and the UK has severed its legal framework from the EU. For those expecting a marked change in the way business is done outside of the trading bloc, the past few months may have come as a shock. EU legislation that applied to the UK before 11 pm on 31 December has been transposed into domestic law – including the majority of provisions concerning financial firms and the securities markets.

Although the UK’s financial reporting and market abuse regimes continue to closely mirror those in effect across the EU, cracks are starting to emerge. Notably, the UK has temporarily ended the need for firms to file RTS 27 reports on execution quality. While the EU has also enacted its own suspension, the UK’s Financial Conduct Authority (FCA) looks set to abolish the requirement altogether.

As the first signs of divergence between the financial regimes of the EU and the newly independent UK begin to show, we’ve summarised the requirements firms must still meet and outlined where things might change.

RTS 27 reporting requirements suspended

RTS 27 reporting (under  Article 27(3) of MiFID II)  involves providing quality of execution data on all instruments traded with reference to cost, price, and speed of execution. The obligation usually applies to all execution venues including regulated markets, MTFs, market makers and all firms that execute client orders under the Best Execution regime. EU law requires firms to submit such reports quarterly and in a machine-readable format.

On 19 March 2021, the FCA announced that it would not take action against firms that fail to produce RTS 27 reports for the remainder of 2021. This move follows concerns about the general utility of such reports along with their relevance given that the upcoming round of submissions would have been based on pre-Brexit execution quality data. The FCA’s misgivings about RTS 27 reporting requirements have also been compounded by the EU’s own two-year suspension of the same provision.

While some firms breathe a sigh of relief as they are relinquished of their RTS 27 reporting obligations, the regulators are considering their positions. A press statement from the European Securities and Markets Authority (ESMA) commented on the potential for a review of the adequacy of execution quality reporting requirements by the European Commission. In the FCA’s equivalent notice, the UK’s financial regulator made clear its intentions to pursue the outright abolition of the requirement.

Although both regulators have temporarily suspended the reporting requirement, only the FCA has given a firm indication that it intends to do away with the RTS 27 obligations altogether. ESMA’s current position is much softer, and naturally depends on the findings of any review by the EU Commission along with the input of member states.

RTS 28 reporting obligations remain

Although firms may not face penalties in respect of RTS 27 reporting omissions, it is important to note that RTS 28 remains in force for UK and EU investment firms. With a due date of 30 April 2021, this provision requires firms to summarise their top five execution venues by trading volume and to provide quality of execution data for each relevant class of financial instruments.

These obligations apply to execution venues, but also firms receiving and transmitting orders along with portfolio managers.

Change on the horizon

Even though there is relative parity between the ESMA and FCA positions regarding RTS 27 reporting, there are indications of a split in direction between the regulators. As already mentioned, ESMA’s promise of a review is far more cautious than that of the FCA. This is perhaps not surprising given that the UK’s regime is not tied to the political machinery of 27 distinct partner nations.

The FCA’s RTS 27 announcement also included a pledge to review the MiFID II notification requirements that obliged financial advisers to notify clients if their investment portfolios fell by 10% or more in value. While this provision was suspended in light of the financial pressures of the COVID-19 pandemic, the potential for a review suggests that the FCA may pursue a more liberal approach to financial reporting in the future.

It could be that the UK’s new-found legal agility leads to greater divergence from the EU in the future. For firms that are subject to reporting and compliance requirements, this all makes for an uncertain situation that looks set to disrupt the relative stability of the MiFID II regime.

Make regulatory reporting simple

As the gulf widens between the recently separated financial regimes of the EU and the UK, firms face a more complex regulatory environment than ever before. Even despite the relaxation of RTS 27 reporting rules, there can be no doubt that the coming months and years will bring further changes on both sides of the English Channel. New legal hurdles will be created, and reviews of market abuse and reporting obligations are already underway.

The prospect of change can be frustrating for firms who invest significantly in the development of their compliance procedures – and especially those who have become subject to dual reporting obligations following Brexit. As new developments complicate regulatory compliance, firms need to ensure their systems can keep pace with transaction monitoring and reporting obligations.

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