What Are the Key Differences in Best Execution Obligations between the Uk and the Eu Post-Brexit?

Concept

The Forking Paths of Obligation

The principle of best execution, a foundational element of investor protection, persists as a shared objective between the United Kingdom and the European Union. Its core mandate requires investment firms to take all sufficient steps to obtain the best possible result for their clients when executing orders. This entails a holistic assessment of factors including price, costs, speed, likelihood of execution and settlement, size, and any other relevant consideration. The departure of the UK from the EU, however, has initiated a significant divergence in the regulatory architecture designed to achieve and evidence this objective.

This is not a superficial alteration of reporting lines; it represents a fundamental branching of regulatory philosophy, driven by distinct strategic priorities. The UK, through the Financial Conduct Authority (FCA), is recalibrating its framework to enhance the competitiveness and agility of its domestic markets. Conversely, the EU remains focused on maintaining a harmonized, prescriptive, and unified regulatory environment across its member states to ensure the integrity and stability of the single market.

This divergence manifests most clearly in the UK’s deliberate move away from certain prescriptive elements of the Markets in Financial Instruments Directive II (MiFID II), which has been onshored into UK law as “UK MiFID”. The UK’s approach favors a more principles-based system, entrusting regulators with greater flexibility to tailor rules to the specific dynamics of the UK market. This strategic uncoupling is predicated on the view that overly rigid, one-size-fits-all mandates can create unintended consequences, such as stifling liquidity or imposing administrative burdens that outweigh their practical benefits for investor protection.

The result is a landscape where firms operating across both jurisdictions must navigate two increasingly distinct sets of rules governing how they execute trades, how they procure investment research, and how they report on their execution quality. Understanding these differences is a matter of operational necessity and strategic positioning.

Post-Brexit, the UK and EU maintain the core principle of best execution but diverge significantly in the regulatory frameworks that define and enforce it.

Foundations of Divergence

The primary catalyst for this regulatory evolution is the UK’s newfound autonomy. Unbound from the EU’s extensive legislative process, which must accommodate the interests of 27 member states, the UK can enact changes with greater speed. This agility has been directed toward specific areas of MiFID II that were identified as particularly cumbersome or ill-suited to the UK’s market structure. A prime example is the treatment of execution quality reporting under Regulatory Technical Standards (RTS) 27 and 28.

The FCA’s decision to abolish these reporting requirements stemmed from a pragmatic assessment of their utility, concluding that the cost and complexity of producing these reports were disproportionate to the value they provided to end investors. This action signals a broader philosophical shift ▴ a preference for outcomes-focused regulation over process-driven compliance.

In contrast, the EU’s approach remains anchored in the belief that detailed, harmonized rules are essential for creating a level playing field and preventing regulatory arbitrage within the single market. While the EU has also suspended certain reporting obligations, its actions have been more cautious, reflecting a continued commitment to the foundational principles of MiFID II’s transparency regime. This creates a dynamic where the UK is actively deconstructing and rebuilding parts of its regulatory house to a new design, while the EU is undertaking a more measured renovation of the existing structure.

For firms, this means that compliance can no longer be managed through a single, unified framework. Instead, it requires a bifurcated strategy that acknowledges and adapts to the unique regulatory currents of each jurisdiction.

Strategy

Navigating the Split in Reporting and Research

The most immediate strategic challenge for cross-jurisdictional firms arises from the divergence in reporting and research procurement rules. The UK’s complete abolition of RTS 27 and RTS 28 reporting requirements simplifies the compliance landscape for firms operating solely within its purview. For those with an EU presence, however, the obligation to produce RTS 28 reports, which summarize the top five execution venues used, persists. This necessitates a dual compliance infrastructure.

Systems and processes must be maintained to capture and report the required data for EU clients and operations, while a different, less burdensome regime applies to UK business. This requires careful segmentation of data, workflows, and compliance oversight to ensure that the obligations of each jurisdiction are met without imposing unnecessary costs on the other.

A similar strategic bifurcation is required for investment research. The UK’s relaxation of the MiFID II “unbundling” rules allows firms to bundle payments for research and execution services under specific conditions, notably for research on smaller companies and in the fixed-income markets. This move is designed to stimulate research coverage where it has diminished. The EU’s “quick fix” also permits some re-bundling, but its scope is defined by different criteria, such as a higher corporate turnover threshold, and it is positioned as a temporary measure.

A firm’s strategic response must therefore consider how it sources and pays for research in each market. It may choose to adopt a bundled payment model in the UK to access a wider range of research on small and mid-cap stocks, while maintaining a strict unbundled approach in the EU to comply with its more restrictive rules. This decision has direct implications for budgeting, client agreements, and the management of conflicts of interest.

Comparative Analysis of Key Regulatory Changes

The table below outlines the specific points of divergence in reporting and research rules, providing a clear framework for strategic planning.

Recalibrating Market Structure and Transparency

Beyond reporting, the divergence extends into the fundamental architecture of market structure and transparency. The UK’s decision to remove the Double Volume Cap (DVC), a mechanism designed to limit the amount of trading that can occur in dark pools, reflects a strategic prioritization of liquidity. The regulatory calculus here is that the DVC, while intended to promote lit market trading, could inadvertently fragment liquidity and hinder efficient execution, particularly for large orders.

By removing this constraint, the UK aims to create a more attractive and liquid trading environment. In contrast, the EU is reinforcing its commitment to limiting dark trading by transitioning to a single volume cap mechanism, underscoring its focus on price discovery within transparent, lit venues.

Firms must now develop distinct venue selection strategies for the UK and EU, optimizing for liquidity in one and navigating volume caps in the other.

This divergence in transparency philosophy requires firms to adopt different order routing and venue selection strategies for each jurisdiction. In the UK, there is greater flexibility to access dark liquidity without the constraints of the DVC. In the EU, firms must continue to monitor their dark pool usage closely to comply with the volume caps. Furthermore, the UK is implementing a more streamlined post-trade transparency regime, particularly for bonds and certain derivatives, aiming for a simpler and more timely reporting process.

A critical technical detail is the change in the scope of instruments “traded on a trading venue” (ToTV). For UK firms, this now applies only to instruments traded on UK venues, a change that complicates the determination of reporting obligations for firms dealing in a mix of UK and EU securities. This necessitates robust internal systems capable of accurately identifying the regulatory status of each instrument and applying the correct transparency rules based on its trading venue.

Execution

Operationalizing Dual Compliance Frameworks

The execution of a dual compliance strategy requires precise operational adjustments. Firms must re-architect their internal systems and workflows to function effectively across two distinct regulatory environments. This begins with the classification of clients and trades.

A robust system must be in place to flag whether a transaction falls under UK or EU jurisdiction, which then dictates the applicable rules for best execution evidence, reporting, and research charging. For reporting, this means configuring systems to generate RTS 28 reports only for the EU-facing side of the business, while decommissioning the corresponding processes for the UK to reduce operational overhead.

Order management systems (OMS) and execution management systems (EMS) require significant recalibration. Order routing logic must be sophisticated enough to account for the different market structures. For instance, an algorithm executing a large block order for a UK client might be programmed to preference dark venues to a greater degree than would be permissible for an EU client, due to the absence of the DVC in the UK.

This requires not just different routing tables but potentially different execution algorithms tailored to the liquidity and regulatory landscape of each market. The following steps outline a high-level operational plan for adaptation:

1. Jurisdictional Mapping ▴ Conduct a full audit of all client accounts and trading flows to definitively map each to either the UK or EU regulatory regime. This forms the foundational data layer for all subsequent compliance controls.
2. System Configuration ▴ Reconfigure compliance and reporting systems to reflect the divergent rule sets. This involves creating separate rule engines for UK and EU trades to manage everything from transparency reporting to research payment attribution.
3. Policy and Procedure Updates ▴ Redraft all relevant policies, including the Best Execution Policy, Order Handling Policy, and Conflicts of Interest Policy. These documents must clearly articulate the different approaches taken in the UK and EU and be disseminated to all relevant staff.
4. Training and Education ▴ Implement a comprehensive training program for traders, compliance officers, and client-facing staff to ensure they understand the nuances of the two regimes and can execute their duties accordingly.

Adapting to New Transparency Regimes

The practical execution of trading strategies is profoundly affected by the diverging transparency requirements. The UK’s move towards a more tailored and principles-based post-trade transparency system for non-equity instruments necessitates a re-evaluation of how and when trade data is reported. Firms must ensure their reporting workflows are updated to align with the FCA’s new timelines and data field requirements. The modification of the ToTV definition is a particularly critical operational point.

Systems that determine reporting obligations must be updated to use the UK’s narrower definition, which could reduce the reporting burden for some instruments but also introduces the risk of under-reporting if not implemented correctly. This requires close collaboration between compliance, technology, and trading teams to ensure the logic is sound.

The divergence in transparency rules requires firms to implement sophisticated, jurisdiction-aware order routing and post-trade reporting systems.

The table below provides a granular comparison of the execution-level considerations related to transparency and market access, highlighting the operational adjustments required.

Finally, the removal of the Share Trading Obligation (STO) in the UK provides firms with greater flexibility in their execution strategies for equities. They are no longer mandated to trade certain shares on UK- or EU-regulated markets and can seek liquidity on other international venues if it results in a better outcome for the client. This operational freedom requires firms to expand their venue analysis and connectivity to a wider range of global trading platforms. The execution strategy must now incorporate a global search for liquidity, guided by the overarching principle of achieving the best possible result, without the prescriptive geographical constraints that the STO previously imposed.

Reflection

Two Systems One Principle

The divergence in best execution obligations between the UK and the EU is more than a technical adjustment; it is an ongoing experiment in regulatory design. On one side, a major financial center is betting on flexibility, principles, and market-led solutions to foster competitiveness. On the other, the world’s largest single market is reinforcing a rules-based, harmonized approach to ensure stability and uniformity. For institutional participants, navigating this evolving landscape is a test of adaptability.

The challenge lies in constructing an operational framework that is not merely compliant with two sets of rules, but is strategically optimized for both. This requires a deep understanding of the systemic goals behind each regulatory choice and the ability to translate that understanding into a coherent, dual-track execution strategy. The ultimate outcome of this divergence remains unwritten, but the firms that will thrive are those that view this complexity not as a burden, but as an opportunity to build a more sophisticated and resilient operational intelligence.