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COBS 21 – Client Orders and Best Execution – Client Order Handling Rules
1. Chapter Summary
COBS 21 sets out the rules firms must follow to handle client orders fairly and efficiently. This chapter ensures that firms treat client orders promptly and accurately, maintaining integrity in the order execution process. It complements the best execution rules by specifying how orders must be processed and monitored to protect client interests and market fairness.
2. Applicability
COBS 21 applies to all investment firms executing or transmitting client orders in the course of MiFID business. It is relevant primarily to retail and professional clients and focuses on firms involved in order handling within regulated activities. Eligible counterparties are generally excluded from certain provisions.
3. Key Rules and Their Meaning
- COBS 21.1.1R – Prompt, Fair and Expeditious Execution Firms must execute client orders promptly, fairly, and expeditiously, taking into account the size and nature of the order. In practice: Firms should have systems and controls to ensure orders are not unduly delayed or disadvantaged.
- COBS 21.2.1R – Client Instructions If a client provides specific instructions about how their order is to be executed, firms must follow those instructions even if it prevents best execution. Meaning: Client instructions take precedence over a firm’s usual execution policy.
- COBS 21.3.1R – Aggregation and Allocation Firms may aggregate client orders with their own or others’ orders only if it is unlikely to work to the overall disadvantage of clients. When orders are aggregated, allocation must be fair and timely. Nuance: Firms must avoid conflicts of interest and ensure transparency and fairness in allocation.
- COBS 21.4.1R – Order Execution Policy Disclosure Firms must provide clients with details of their order execution policy and any material changes to it. In practice: Transparency builds trust and allows clients to understand how their orders will be handled.
- COBS 21.5.1R – Record Keeping Firms must keep records of client orders and how they are handled, including evidence of execution and allocation. Meaning: Robust recordkeeping supports regulatory oversight and complaint handling.
4. Interpretation Notes / FCA Expectations
- The FCA expects firms to handle client orders in a manner that prevents unfair treatment or execution delays.
- Firms should document and test their order handling procedures regularly to demonstrate compliance.
- The FCA highlights the importance of clear communication with clients regarding order handling and the impact of their instructions.
- Firms must have policies to manage aggregation risks and prevent conflicts arising from combining client and firm orders.
5. Practical Considerations for Firms
- Maintain documented order handling policies covering promptness, fairness, aggregation, and allocation.
- Implement systems and controls to monitor order execution times and allocation processes.
- Provide clear disclosures of order handling policies and any updates to clients in pre-contractual and ongoing communications.
- Keep detailed records of all client orders and execution outcomes, ensuring traceability and auditability.
- Train staff on the importance of adhering to client instructions and fair order handling practices.
6. Related Handbook References
- COBS 19 – Execution and Transmission of Orders (best execution rules)
- COBS 10 – Client Communications (disclosure requirements)
- SYSC 10 – Systems and Controls (governance of order handling)
- PRIN 2A – FCA Principles for Business (client interests, integrity)
- MAR – Market Abuse Regulation (related to fair and orderly markets)
7. Regulatory Focus / Enforcement Risk
- The FCA closely monitors order handling practices, especially around aggregation and allocation, due to the risk of client detriment.
- Failure to follow client instructions or delay in execution can trigger regulatory sanctions.
- Inadequate recordkeeping and lack of transparency on order execution policies are common areas of FCA enforcement attention.
- Firms should proactively review order handling controls to mitigate enforcement risks.