On hearing the news the FCA has relaxed the regulations around the 10% drop notification rule until 1 October, Ray Tubman assesses what this really means for platforms and financial advisers…
In the midst of the global pandemic, at a time when there is much to worry about in the world, the regulator has seen fit to relax the MiFID
2 Depreciation rule to enable firms to focus on the far more important aspects of running businesses and supporting advisers and investors through this period of turmoil.
I just read the press headlines “FCA screaps MiFID II 10% letter rule”, “FCA pauses MiFID II 10% rule”, “FCA halts 10% drop rule”. And then I read the FCA’s Dear CEO letter. The headlines and the contents of the letter just don’t add up. [Ed. Professional Adviser reported: “Regulatory temporarily softens 10% drop notification rule for coronavirus crisis“.]
The upshot of the letter is that 10% depreciation reporting can be halted until October for professional investors only. Professional investors are those with significant (high value) investment portfolio, trading history or professional experience and represent high net worth, educated investors.
For other retail investors (also read “the vast majority”), there remains the requirement to report at least once when the depreciation exceeds 10% within a reporting period, but the FCA has relaxed the need to perform further reporting in the same period. Subsequent drops and changes in the market conditions can be communicated in general terms through the public communication channels.
So, has the 10% depreciation really been scrapped, paused or halted? No it hasn’t.
One small subset of retail clients has been paused, but the need to report at least once to retail investors remains in place.
Ironically, this decision may just create more work for retail platforms to separate out those retail investors from the professional investors when deciding who gets notified.
As we are about to enter the next reporting quarter for many firms, the depreciation calculation will reset and (in light of a hugely volatile market) the number of retail investors who need to be notified within this period may be almost as high as it was in the previous period, but optionally for professional investors.
So, why has the FCA relaxed this particular regulation and not other others?
The answer is clear in the letter itself.
The first reason cited is the “concerns about the impact on consumers”. The market has dropped massively and we have estimated around three-quarters of all discretionary portfolios will have had 10% depreciation reports sent out in Q1 2020.
FCA compromise on 10% drop notifications contains ‘unnecessary’ catch
There is rightly some concern that everybody is fully aware of the carnage happening around them and, given the world is in upheaval, it is understandable that we don’t need to keep reporting further portfolio drops to investors in the midst of everything else happening around them.
The second reason cited is the “operational burden” of generating these statements. I think this is actually the main reason that many firms have contacted the FCA asking for some easing. Our data analysis has shown that, on some peak days, up to 25% of the entire cohort of discretionary accounts may have been reported.
When performed manually, this has the potential to be a staggering amount of manual effort. If this reporting were automated, then there would be very little “operational burden”.
I might suggest that the lack of an automated software solution for this reporting process is the main reason the industry has pushed for this regulation to be relaxed.
The industry has approached this regulation with contempt and with the view that it will never happen and so have implemented manual processes to deal with it. When it has happened, those manual processes are simply unable to cope with the sheer scale of the reporting task.
Any press release on 10% depreciation reporting always invokes dozens of comments of condemnation for the regulation itself. Personally, I struggle to condemn any regulations that give greater transparency to the investor. The regulation is well-intentioned.
Our data analysis has also shown that investors don’t just panic sell as soon as receiving a notification. Advisers manage the relationship, so this should never be a surprise to the investor.
Our TierDrop microservice has been specifically built to report on a 10% depreciation and to initiate the automation of notifications. It is built for this purpose. It is efficient. It is automatic.
Of course, these statements cannot be just released to the investors without suitable comfort and guidance from their financial adviser and it is the maintenance of these relationships that should be presenting the biggest challenge to the market – not the production of the notifications themselves.
Ray Tubman is managing director at FinoComp