In late 2022, the Monetary Authority of Singapore (MAS) announced a complete ban on payment for order flow (PFOF) in Singapore. The move is designed to protect investor interests by mitigating the risk of conflicts of interest arising in brokers’ best execution obligations to their customers. The PFOF ban will commence on 1 April 2023 and can affect financial firms and individuals operating under a capital markets services (CMS) licence in Singapore.
What Is PFOF (Payment for Order Flow)?
Capital markets (CMS) brokers have previously been able to gain commission and other forms of payment from other brokers, counterparties, and market makers for the placement and execution of customer orders. Although payment for order flow may only amount to fractions of cents per share, they can become substantial totals when aggregated.
How Does PFOF Create Conflicts of Interest?
When CMS broker incentives or payments are received for routing customers’ orders to a specific broker or counterparty, it creates the possibility of broker decisions becoming personally influenced. Brokers may be tempted to route orders for reasons of personal financial gain. This situation is in direct conflict with the broker’s best execution obligation, which seeks to drive optimal outcomes for the customer.
As the Guidelines to MAS Notice SFA 04-N16 on Execution of Customers’ Orders details, “PFOF introduces conflicts of interests and is likely to cause harm to customers as the CMS Broker may be incentivized to pursue commission or other form of payment from another broker or counterparty in return for routing customers’ orders to that broker or counterparty for its own benefit. This is inconsistent with the CMS Broker’s duty to provide Best Execution to customers.”
Who is affected by the PFOF ban?
Under the updated regulatory requirements from MAS, the PFOF ban will be effective from 1 April 2023. It will impact brokers and financial firms dealing in securities, derivatives, collective investment schemes and leveraged FX products.
The ban continues the trend from other global regulators. The UK, EU, and Canada have already banned PFOF, with Australia enacting temporary prohibitions while authorities consider a total ban. So while CMS brokers and financial firms in Singapore, the UK, EU, Canada, and Australia may be affected right now, the observed shift towards the prohibition of payment for order flow may include more jurisdictions in the future.
How Your Firm Can Reduce Conflicts of Interest Risk
Conflicts of interest in financial firms can happen for a range of reasons. While regulatory requirements from authorities across the globe set out clear rules and guidance, many firms have found themselves inadequately equipped on examination.
Simply having systems in place to monitor potential issues is not enough to fulfil regulatory compliance obligations. Your firm’s technology must be capable of proactively flagging potential conflicts and suspicious activity to compliance teams. It must also quickly and effectively produce reporting and documentation that confirms or disproves any assumptions of wrongdoing, particularly upon request by regulators.
MCO’s integrated compliance management suite enables firms to identify conflicts of interest more efficiently across their entire organisation. MCO provides a consolidated platform for compliance teams to manage areas of potential conflict, including:
- Trade surveillance
- MNPI disclosure
- Personal account dealing
- Close personal relationships
- Attestations, registrations and licences
- Outside business activities
- Gifts, entertainment, and hospitality
For more information about how MCO’s innovative compliance management platform can help your firm effectively manage conflicts of interest, schedule your no-obligation meeting with MCO APAC Director, Kelly-Ann McHugh, or request your demo now.
Uncover the strategies you need to reduce risk and strengthen your overall compliance management process. Download your complimentary eBook, The Ultimate Guide to Conflicts of Interest.