FCA to consult on reforming 10% drop rule

FCA to consult on reforming 10% drop rule

The FCA has said it will review the 10 per cent drop rule after extending its suspension until the end of the year.

In an update on the watchdog’s website, the FCA said the rule, which required financial advisers to notify clients whenever their investment portfolios had fall by 10 per cent or more, would be reviewed in the spring.

The ruling was introduced under Mifid II but has been put on hold since the start of the pandemic due to increased market volatility - with an extension announced in September.

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The regulator has said the pause will now be extended until the end of 2021, but a consultation on how the rule might be changed will be held in the spring.

The 10 per cent rule suspension was put in place to "help firms support consumers during periods of actual/potential market volatility linked to the spread of Covid-19 and the Brexit transitional period” the FCA said. 

It added: “We said we would show supervisory flexibility on firms’ ongoing compliance with the requirement so long as certain criteria were met.

“This period of flexibility has given us the opportunity to consider the effectiveness of the 10 per cent depreciation notification requirement.

“We intend to consult on changes to the requirement later this Spring. 

“We are therefore extending the temporary measures for firms until the end of 2021 while we undertake policy work on the future of the requirement.”

Tim Fassam, director of government relations and policy at adviser trade body Pimfa, said: “We are pleased the FCA has decided to extend the relaxation of the 10 per cent rule until the end of 2021 having first done so at Pimfa's urging at the start of last year’s pandemic. This will bring much needed certainty to many firms in the current economic climate.

“The UK’s departure from the European Union meanwhile gives us, as an industry, and the FCA the chance to fully engage on the regulatory regime in Britain and to discard some rules which firms may consider cumbersome or unnecessary.

"It is right that the regulator examines whether certain current rules are necessary for a competitive and well-functioning UK wealth management industry.”

At the start of the pandemic, the Personal Finance Society warned that the 10 per cent rule could create additional “workload pressure and anxiety for consumers” during the pandemic.

Following the last extension of the pause in September, the FCA had advised IFAs to communicate with clients on how to check their portfolios, as well as direct them to “non-personalised communications” such as websites where they can find information and updates on market conditions.

In its statement, the FCA reminded IFAs of their obligations to “still pay due regards to the interests of their customers and treat them fairly, and pay due regard to the information needs of their clients, and communicate information to them in a way which is clear, fair and not misleading.”