Investment firms should review their compliance with “best execution” rules, British regulators say, in the wake of a review that found firms are failing to ensure that clients, both retail and professional, get best execution when trading on their behalf.

The UK’s Financial Conduct Authority (FCA) reports that its examination of 36 firms’ trading practices found that many of them do not understand key elements of best execution rules, and they are not adequately controlling client costs when executing orders. It also said that these failings are compounded by a lack of managerial oversight when it comes to delivering best execution.

“Firms told us that best execution is a simple commercial imperative – yet our review shows many firms unacceptably fail to put their clients’ interests first, undermining market integrity and inhibiting competition,” said David Lawton, FCA director of markets.

The FCA said that it found that the best execution rules were often poorly understood, or incorrectly applied, with firms frequently attempting to limit their obligations to clients. It also reports that it found firms attempting to evade FCA rules so that they could continue to receive payment for order flow by revising the description of services they offered to clients. It promises to take enforcement action against any firm that continues to do this.

Additionally, the regulator reports that most firms lacked the capability to effectively monitor order execution or identify poor client outcomes; firms were often unable to demonstrate how they managed conflicts of interest when using internal systems to deliver best execution for their clients; and, it was often unclear who was responsible for best execution.

The FCA advises all firms to review their best execution arrangements in light of these findings, and says they should take immediate action to ensure that they comply with the rules. “The FCA expects to see firms act as good agents, placing equal focus on controlling client costs as delivering returns, and will take action where firms fall short of our standards,” said Lawton.