What Are the Primary Differences between Fca and Esma Best Execution Reporting?

Concept

The Regulatory Schism in Execution Data

The operational divergence between the Financial Conduct Authority’s (FCA) and the European Securities and Markets Authority’s (ESMA) approach to best execution reporting is a direct consequence of post-Brexit regulatory independence. While both regimes are founded upon the same MiFID II principles of ensuring optimal outcomes for clients, their trajectories on the utility of specific reporting mechanisms ▴ namely, the Regulatory Technical Standards (RTS) 27 and 28 ▴ have markedly separated. This separation presents a critical strategic consideration for any firm with a footprint in both the United Kingdom and the European Union. Understanding the distinction is a matter of navigating two different philosophies on data-driven transparency and its practical benefits.

At its core, the original intent of RTS 27 and RTS 28 was to create a harmonized, data-rich ecosystem. RTS 27 required execution venues (including exchanges, systematic internalisers, and market makers) to publish quarterly reports detailing a wide array of execution quality metrics. Concurrently, RTS 28 mandated that investment firms annually disclose their top five execution venues for each class of financial instrument, alongside a qualitative summary of the execution quality achieved.

The theoretical synergy was clear ▴ investors and firms would use the granular data from RTS 27 reports to scrutinize and compare venue performance, while RTS 28 reports would provide transparency into where firms were directing client order flow and why. This framework was designed to empower clients and hold firms accountable through empirical data.

The fundamental difference lies not in the principle of best execution, which remains a constant, but in the mandated formalisms of its proof.

However, the practical application of these standards led to a consensus on their limitations. Both UK and EU authorities observed that the reports were costly to produce and difficult to interpret. The sheer volume of data in RTS 27 reports made meaningful comparisons challenging, and the RTS 28 reports were often seen as insufficient for drawing robust conclusions about execution quality. It is this shared conclusion on the reports’ lack of utility that prompted the regulatory divergence.

The FCA, exercising its newfound autonomy, opted for a swift and decisive removal of these obligations. In contrast, ESMA has embarked on a more gradual legislative path toward the same goal, creating a transitional period of ambiguity.

Strategy

Navigating Asymmetric Reporting Obligations

For an institution operating across both UK and EU jurisdictions, the divergence in best execution reporting mandates a dual-track operational strategy. The primary distinction is one of definitive cessation versus transitional forbearance. In the United Kingdom, the FCA’s decision, effective from December 1, 2021, was unequivocal ▴ the requirements to prepare and publish RTS 27 and RTS 28 reports were entirely removed. This allows UK-domiciled entities to decommission the systems and processes dedicated to generating these specific reports, freeing up significant operational and compliance resources.

Conversely, the European Union, under ESMA’s guidance, presents a more complex strategic landscape. ESMA has publicly stated that National Competent Authorities (NCAs) should not prioritize supervisory actions related to the publication of RTS 27 and 28 reports. This stance was taken in anticipation of forthcoming legislative changes from the MiFID II/MiFIR review, which aims to formally eliminate these reporting requirements.

However, until these changes are fully transposed into the national laws of each EU member state ▴ a process that can take a considerable amount of time ▴ the legal obligation technically persists. Therefore, a firm’s EU entities must maintain a state of readiness and possess a clear, documented rationale for any decision to suspend report generation, grounded in ESMA’s public statements.

A Tale of Two Timelines

The strategic challenge is managing compliance across these different timelines. A firm cannot simply apply the UK approach to its EU operations. The core obligation to achieve and demonstrate best execution remains a high priority for ESMA and the NCAs. The deprioritization of RTS 27/28 enforcement is not a blanket waiver on execution monitoring.

Firms must ensure their underlying best execution policies, order handling procedures, and execution quality analysis (EQA) frameworks are as robust as ever. The focus shifts from the production of a specific, standardized report to the quality of the internal governance and analytical systems that ensure the best execution duty is met.

A firm’s strategy must pivot from a focus on prescribed public disclosure to an emphasis on the robustness of its internal execution quality governance.

This strategic pivot has several implications:

• Resource Reallocation ▴ In the UK, resources previously allocated to RTS 27/28 can be confidently redirected toward enhancing other areas, such as Transaction Cost Analysis (TCA) systems or algorithmic trading performance measurement. In the EU, some of these resources may be reallocated, but a portion must be retained for monitoring the evolving regulatory landscape and maintaining the capability to produce reports if requested by an NCA during the transitional period.
• Compliance Documentation ▴ For EU operations, it is critical to maintain detailed internal records that document the firm’s awareness of ESMA’s position and its continued adherence to the substantive best execution requirements. This documentation serves as a crucial defense in the event of a regulatory inquiry.
• Client Communication ▴ Firms must be prepared to articulate their approach to clients. For UK-based clients, the explanation is straightforward. For EU-based clients, the communication requires more nuance, explaining that while the specific reports are suspended in line with regulatory guidance, the firm’s commitment to and systems for ensuring best execution are undiminished.

The table below summarizes the core strategic differences in approach required by the two regulatory environments.

Execution

Implementing a Bifurcated Compliance Framework

The execution of a compliance framework that accommodates both the FCA and ESMA regimes requires a precise and well-documented internal system. The overarching principle is that the substantive duty of best execution remains universal. The divergence is purely in the method of its public attestation via RTS 27 and 28.

Therefore, the core execution quality analysis (EQA) and Transaction Cost Analysis (TCA) systems of the firm should remain unified and robust. These systems are the engine that ensures the firm meets its obligations to clients, regardless of the reporting requirements in place.

The practical implementation involves creating a bifurcated reporting layer on top of this unified EQA core. For UK business, the output from this layer is effectively nullified for RTS 27/28 purposes. For EU business, this layer must be maintained in a state of readiness.

This means the data feeds and logic required to generate the reports should be preserved and periodically tested, even if the final reports are not published. This ensures that if an EU regulator or a client specifically requests the information during the transition period, the firm can produce it without a significant fire drill.

System-Level Adjustments and Governance

From a systems architecture perspective, this means that data capture mechanisms must remain intact. All the necessary data points for RTS 27/28 ▴ such as price, costs, speed of execution, and likelihood of execution ▴ should continue to be logged and stored in a structured manner. The key change is in the final reporting module, which can be toggled ‘off’ for UK entities and set to ‘standby’ for EU entities.

The following table outlines the key execution factors and how a firm’s internal systems should handle them in light of the regulatory divergence.

Internal governance procedures must also be updated. The firm’s Best Execution Committee or equivalent governing body should formally minute the decision to cease production of RTS reports for UK entities, citing the FCA’s Policy Statement PS21/20. For EU entities, the committee should minute its acknowledgment of ESMA’s statement on non-prioritization of enforcement and the firm’s decision to suspend publication while maintaining technical readiness and continuing to rigorously monitor execution quality through its established internal procedures. This creates a clear and defensible audit trail.

1. Review and Update ▴ The first step is a comprehensive review of the firm’s Best Execution Policy to ensure it reflects the current regulatory state in both the UK and the EU. The policy should explicitly state the firm’s approach to RTS 27/28 in each jurisdiction.
2. System Segregation ▴ The reporting logic within the firm’s compliance systems must be segregated. This involves creating distinct rule sets for UK and EU entities regarding the generation of best execution reports.
3. Continuous Monitoring ▴ A process must be established for the continuous monitoring of legislative updates from EU member states regarding the transposition of the MiFID II/MiFIR review. This ensures the firm can transition from ‘standby’ to a full ‘off’ state for its EU reporting module as soon as it is legally permissible in each relevant country.

Reflection

Beyond the Report

The divergence on RTS 27 and 28 reporting is more than a procedural footnote; it is a signal about the future of regulatory supervision. The consensus that these specific reports failed to deliver meaningful transparency pushes the burden of proof inward. The focus intensifies on the quality of a firm’s internal systems, the sophistication of its execution analysis, and the integrity of its governance.

A superior operational framework is defined by its ability to demonstrate best execution through its own robust analytics, with or without the mandate of a standardized public report. The question for every institution now becomes ▴ is our internal framework for measuring and ensuring execution quality robust enough to stand on its own?