Mifid II  

Why advisers will still have to send 10% drop letters

Why advisers will still have to send 10% drop letters

Advisers will have to send further 10 per cent depreciation notifications to their clients if markets continue to fall, despite the regulator’s “flexible approach”.

Yesterday evening (March 31) the Financial Conduct Authority told advisers they were allowed to take a flexible approach on the 10 per cent notification requirement, part of Mifid II, in light of the volatile market conditions caused by the coronavirus crisis.

The City watchdog said firms were only required to issue one notification — indicating their portfolio has decreased in value by at least 10 per cent — within a reporting period providing they continued to give general market updates to their clients.

But a standard reporting period within Mifid II regulation is “once every three months”, with many firms opting to use the calendar year meaning a new reporting period would begin today (April 1).

This means advisers would be required to report another 10 per cent portfolio drop if it occurred today, even if the client had received multiple notifications over the past three months.

The FCA said: “In an example of a periodic valuation date of March 31, and a 10 per cent fall on April 1, then a customer notification would be required.”

The regulator would not expect further notifications to be sent between April 1 and June 30, however, but the tally would start again on July 1.

In normal circumstances the rule dictates that portfolio managers inform clients by the end of the business day if the value of their portfolio depreciates by more than 10 per cent from the beginning of the last reporting period, which is at least quarterly.

It also requires the manager or adviser to inform their client of each subsequent fall of a multiple of 10 per cent.

But the markets have seen some of their biggest rises and falls in 30 years as countries closed borders and introduced lockdowns to curb the pandemic and 25 per cent has been wiped from the UK’s blue chip index since the start of the year, meaning some clients could have received multiple notification letters.

The FCA's flexible approach will be in force for six months, until October 1, 2020.

imogen.tew@ft.com

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