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ESMA warns firms and investors about risks arising from payment for order flow

13 July 2021

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, is issuing a public statement to remind firms that the receipt of payment for order flow (PFOF) raises significant investor protection concerns. It also highlights key MiFID II obligations aimed at ensuring firms act in their clients’ best interest when executing their orders.

ESMA is of the view that, in most cases, it is unlikely that the receipt of PFOF by firms from third parties would be compatible with MiFID II. In addition, ESMA also addresses specific concerns regarding certain practices by zero-commission brokers.

PFOF is the practice of brokers receiving payments from third parties for directing client order flow to them as execution venues. PFOF causes a clear conflict of interest between the firm and its clients, because it incentivises the firm to choose the third party offering the highest payment, rather than the best possible outcome for its clients when executing their orders.

ESMA is telling firms that they must thoroughly assess whether, by receiving PFOF, they are able to comply with relevant MiFID II requirements, most notably those on best execution, conflicts of interest, inducements and cost transparency.

ESMA also requests National Competent Authorities, especially in those Member States in which PFOF has been observed, to prioritise this topic in their supervisory activities for 2021 or early 2022. These activities should aim at assessing the actual impact of PFOF on firms’ compliance with relevant MiFID II requirements.