Financial Conduct Authority  

FCA pauses 10% drop rule for further 12 months

FCA pauses 10% drop rule for further 12 months

The Financial Conduct Authority has extended its 10 per cent depreciation notification exemption for a further 12 months.

The FCA said it is exploring possible reform of the rule and will therefore keep its current flexible approach in place until December 31, 2022.

The rule, brought in by Mifid II, asks portfolio managers to inform their clients by the end of the business day if the value of their portfolio depreciates by 10 per cent or more 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 10 per cent or more.

However, as part of the FCA's flexible approach, firms are only required to issue one notification within a reporting period providing they continue to give general market updates to their clients.

Firms will still be required to inform clients that they may not receive similar notifications if their portfolio drops by another 10 per cent in the reporting period. 

The FCA also asked that clients be reminded of how to check their portfolio value and signposted to "non-personalised communications", such as on websites, which outline updates on market conditions. 

In March 2020, the FCA first paused the 10 per cent depreciation rule in response to some of the biggest market falls seen in modern times as a result of the pandemic. 

In October last year, the FCA extended its flexible approach in preparation for further potential market volatility. 

Following this in March 2021, the FCA said it would maintain the temporary measures while Her Majesty’s Treasury (HMT) carried out policy work on the future of the requirement as part of its Wholesale Markets Review (WMR).

Findings from the WMR have indicated support for removing or amending the requirement and policy work on the rule's future is currently underway.

Tim Fassam, director of government policy and relations at Pimfa, welcomed the move.

He said: "[It] is a welcome and sensible step given the impact the Omicron variant, and subsequent uncertainty it has caused, has had on markets in recent days.

“However, we have always been of the view that the 10 per cent depreciation rule needs further reform in the longer term.

“This was always a rule that had more relevance for European Union financial markets than it did for the UK and our departure from the EU presents our industry, and the FCA with an opportunity to enact reforms that better fit our own domestic markets.

"We will continue to lobby the FCA and Treasury for changes to the UK’s domestic regulatory regime that better reflect the way our market operates.”

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