The government has laid before parliament a statutory instrument which scraps the rule permanently from January 18, 2023.
Other measures in the statutory instrument, which concern organisational requirements for investment firms, come into effect on June 7, 2023.
Statutory instruments are a form of legislation which allow ministers to amend the law without necessarily a vote in parliament if they have been given the power to do so in an already-passed act of parliament - in this instance the act in question is the one which implemented Mifid II in 2014.
The controversial 10 per cent drop rule was introduced by Mifid II in 2018 and means clients must be informed by the end of the working day if their portfolios drop by 10 per cent or more in a certain period, which is at least quarterly.
Any further drops in value by more than 10 per cent must also be communicated.
Ditching the 10 per cent drop rule is long overdueDavid Tiller, Quilter
The regulation has been criticised due to the impact it could have on clients who become spooked by market volatility.
Indeed the rule was suspended when the onset of the Covid-19 pandemic saw huge fluctuations in global markets, with the FTSE 100 dropping by more than 30 per cent in two weeks.
This temporary suspension has yet to be lifted and lapses at the end of 2022.
If the FCA takes no action, the rule will come back into effect on January 1, 2023.
Robert Vaudry, managing director of DFM Copia Capital, said: "At best these notifications were irrelevant, but at worst they risked panicking investors to move out of the market thereby crystallising their losses."
A HM Treasury spokesperson said: “Our reforms to the operation of our wholesale markets will boost their competitiveness – while ensuring that retail investors do not unnecessarily consolidate losses, when in many cases investment portfolios may rebound.”
Firms are currently required to issue just one notification to a retail client within a reporting period providing they continue to give general market updates to their clients.
In March 2021, the FCA said it was reviewing the rule with a view to reforming it, and was working alongside HM Treasury as part of its wholesale markets review.
David Tiller, commercial and propositions director at Quilter, said ditching the rule was “long overdue”.
“The regulator itself effectively admitted the rule was not fit for purpose given the rules were changed as a result of the Covid market falls we saw….[the rule] has always had the capability of being detrimental to customer investments by breeding the exactly wrong sort of behaviour we would expect from long-term investors.”