Mifid IIJul 2 2021

Govt looks to scrap 10 per cent drop rule

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Govt looks to scrap 10 per cent drop rule
Jaswant Bhopal/Dreamstime.com

The government will consult on scrapping the 10 per cent drop rule after dropping it for professional clients as part of an amendment to the Mifid II regulations.

In a memorandum to parliament, the Treasury proposed that Mifid II be amended to allow professional clients and investment firms to agree between them what reporting is appropriate based on their specific circumstances.

It said it would revoke some rules in respect of professional clients following feedback and consult on whether this change should be extended to retail clients as well. 

The government stated: "The instrument amends an existing requirement for investment firms providing portfolio management services to inform their client whenever the overall value of the portfolio depreciates by 10 per cent and thereafter at multiples of 10 per cent.

"Feedback from professional clients has been that having these reports every time their portfolios depreciate by multiples of 10 per cent is not useful to them. They and investment firms would prefer to be allowed to agree between them what reporting is appropriate based on their specific circumstances.

"The instrument therefore revokes this obligation in respect of professional clients. The government plans to consult on
whether this change should be extended to retail clients as well."

The 10 per cent drop rule was introduced as part of Mifid II but it was put on hold at the start of the pandemic due to increased market volatility.

In March the Financial Conduct Authority said it would review the 10 per cent drop rule, which requires financial advisers to notify clients when their investment portfolio has fallen by 10 per cent or more in a given reporting period, after extending its suspension until the end of the year.

Steven Levin, chief executive, Quilter Investors said the reform has been a long time coming.

“The fact the rule has been 'paused' for so long now shows that it really wasn’t working, and removing it for retail clients along with professional clients would be a victory for common sense regulation.

“The rule has the potential to encourage bad outcomes. Warnings are, by definition, designed to scare people into taking some form of action.

"But warning people after a market drop is the worst possible time as it’s likely they will panic and lock in their losses.

“The fact the regulator has already changed the rules, which originated as part of EU's Mifid regulations, suggests that the 10 per cent drop notification is not fit for purpose and it’s about time the rule was scrapped once and for all.”

The industry has long called for the rule to scrapped over concerns it could cause knee jerk reactions from investors.

There were signs the rule was discouraging some advisers from using multiple platforms, as they found themselves looking at the assets held on all platforms and manually calculating the overall drop.

The government is also looking to remove the obligation on investment firms that they produce an annual report setting out the top five venues they have used for the execution of clients orders, and a summary of the execution outcomes achieved.

Also amended will be the rule that requires firms to provide detailed contract notes for trades executed on behalf of clients, and quarterly reports on portfolio management services.

The memorandum said: “These requirements were designed to be useful to retail clients, but they are costly for firms to produce and wholesale clients often obtain the information they require from other sources.”

The Treasury aims to lay the instrument before parliament by the end of this year.