FCA extends 10% drop rule suspension for additional six months

The UK regulator, the Financial Conduct Authority (FCA), this morning extended the 10% drop rule suspension for a further six months to March 2021 as it warned of market volatility linked to the continued spread of covid-19 and Brexit developments.

The temporary coronavirus pandemic-related measure was first introduced in March this year as market volatility spiked.

Firms providing portfolio management services or holding client accounts have had to notify clients of 10% market drops since the Markets in Financial Instruments Directive II (MiFID II) came into effect a little over two years ago.

We believe the flexibility offered in this statement will further help firms to support consumers in these uncertain times.”

However, during the early stages of the pandemic and subsequent market turbulence, the rule became burdensome on financial advisers and others as they had to report on multiple drops.

The watchdog said firms had complained this regulation had created an “operational burden” and suspended the requirement, subject to certain conditions, from 31 March. It had been due to cease on 30 September but is now in place for a further six months.

It warned clients faced difficult investment choices as market volatility linked to the coronavirus pandemic and Brexit continued. 

The FCA said it would not take action provided:

  • Firms issued at least one notification in the current reporting period, indicating to retail clients that their portfolio or position has decreased in value by at least 10%
  • Firms informed these clients that they may not receive similar notifications should their portfolio or position values further decrease by 10% in the current reporting period
  • And clients were referred to non-personalised communications, perhaps made available on public channels, that outline general updates on market conditions (these could contextualise potential drops in portfolio or position value to help consumers meet their objectives, rather than making impulse decisions about their investments) and
  • Firm reminded clients how to check their portfolio value, and how to get in touch with the firm

The regulator said firms must still pay “due regards to the interests of their customers and treat them fairly (Principle 6), 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 (Principle 7).”

It added: “If we have concerns that potential serious misconduct may cause (or have caused) significant harm to consumers, then we will consider the appropriate response, which may include opening an investigation.”

The FCA also pointed businesses to its guidance on messaging firms can give clients on pensions and investments during market turmoil.

The statement said: “In light of potential market volatility arising from the continued spread of covid-19 and the end of the Brexit transitional period, we believe that consumers still face many difficult choices about their investments. We have previously issued guidance for the messages firms can give customers on both pensions, and investments and life assurance.

“We believe the flexibility offered in this statement will further help firms to support consumers in these uncertain times.”

This article was first published by our sister title Professional Adviser

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