Can you do it, yes you can...

I apologise for putting irritating tunes into your head but PFOF (Payment for Order Flow) is a little like one of those irritating tunes that keeps popping back up. When you first hear the acronym the back of your mind is saying "don't make your problems mine mate" because PFOF has been rumbling around for years.

I had cause the other day to look at an old interview with Madoff on the topic where he really doesn't see any problem with charging both sides of a transaction. Since then there have been papers by IOSCO, white papers by the SEC, a ban by ASIC. Closer to home and taking ESMA;s lead, the FCA has said on several occasions that they see charging both sides as a conflict. But, not always...

In April 2019, the FCA's PFOF paper took the trouble to explain terminology many of us had struggled with "exclusive liquidity" and "non-exclusive liquidity" as its not language many of us use day to day. Then we are given a worked example of where charging both sides of ECP business is not a conflict because your role is neutral towards each side.

Before you rush off and change your procedures and reinstate charging, take some very careful steps. First, be sure to have all your policies and procedures around conflicts documented and up to date. Then update your training to everyone. Then refresh your conflicts register: start with PFOF is not permitted unless there is transactional approval and then assess individual transactions involving ECPs to see if you meet the very high bar FCA has set for permitting PFOF for non exclusive liquidity transactions with ECPs.

Make sure you have a senior manager with accountability for conflicts in place and that you report all of this to the committee responsible for oversight of conflicts. And of course, do all of this in the first line so that the second line remains independent and can challenge you internally. Maybe the sound of that irritating little tune has dissipated a little by now.