10% portfolio decline rule dropped for six months to ‘ease burden’ on financial advisers

Firms complained to the Financial Conduct Authority that the requirement to notify clients their portfolio had declined by 10% in a short space time created an “operational burden” in light of recent market turbulence

A regulatory requirement that requires financial advisers and wealth managers to notify clients when a portfolio suffers a 10% or more drop in a three-month period has been relaxed for six months.

Under the European Union’s Markets in Financial Instruments Directive (Mifid II), which came into force on 1 January 2018, the 10% rule applies to financial advisers who manage a client’s portfolio on a  discretionary basis, rather than offering advice or providing execution-only services. When the portfolio declines by 10% advisers and wealth managers have a statutory duty to point this out to them

Firms complained to the Financial Conduct Authority (FCA) that this requirement has created an “operational burden” in light of recent market turbulence, as they would need to write to the majority of clients. In order to help firms, the city watchdog has therefore relaxed the rule for six months – until 1 October.

In a letter to advisers and wealth managers, the FCA adds it expects firms to provide strong support and service to customers during this period. The FCA also states: “Firms should be clear and transparent and provide support as consumers and small businesses face challenges at this time. We also expect firms to manage their financial resilience and actively manage their liquidity. Firms should report to us immediately if they believe they will be in difficulty.”

The relaxation of the rule has been widely welcomed.Ryan Medlock, senior investment development and technical manager at Royal London, says: “This is a sensible move by the FCA on several levels. In the context of the current market turbulence, relaxing this rule should ease one of the many burdens facing advisers right now. It will also be of real benefit to clients who really don’t need to be bombarded with multiple letters to inform them their portfolio has dropped another 10% during these turbulent times.”

Lawrence Cook, head of UK Intermediary Distribution at Sanlam, agrees: “The news that the FCA is prepared for some flexibility with the 10% drop notification will be welcomed by many. Operationally it is very challenging, and at a time when all mixed asset class portfolios are suffering similar falls, the notification is not in itself helping to draw attention to exceptional performance of a fund or a fund manager.

“The broad media coverage of market falls means that the FCA can be confident clients will not be surprised or ill-informed about the likely impact on their investment portfolios.”