Article 62, the 10% drop notification rule, is to be scrapped following The Markets in Financial Instruments (Amendment) Regulations 2022 legislation.
The rule required customers to be informed of a drop in the value of their discretionary managed portfolio greater than 10% of the opening value in the quarter.
The change has been welcomed by the industry, with the rule being referred to as “one of the least effective pieces of regulation on the books” and “breeding the exactly wrong sort of behaviour we would expect from long-term investors”.
AJ Bell Investcentre head of marketing, Mark Rendle commented: “The 10% rule was designed to ensure customers who’d lost touch with their investments over the years would be re-engaged, but for those already well-served by advisers the notice only created increased levels of administration and, in some cases, anxiety.
“Investment is all about the long-term and raising anxiety levels in this way always ran the risk of pushing consumers into making poor decisions based on short-term market fluctuations.”
He aded that in many cases receiving notification of a 10% drop in the value of investments “only encouraged knee-jerk responses during moments when calm heads were needed. It also created a distraction for DFMs, platforms, and advisers at critical times when their efforts and attention could be more usefully focussed elsewhere.”
David Tiller, commercial and propositions director at Quilter said he believed the scrapping of the rule would lead to better engagement with consumers: “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. Taking that example, if a customer sold out when a 10% drop notification was triggered, they would have missed out on the substantial returns seen in 2020.
“This does not mean providers and advisers simply do not communicate the bad news to clients. Doing so would be a complete dereliction of duty. However, and this is where the Consumer Duty can play a crucial role, using behavioural science techniques and properly framing your communications will be crucial to aid customer understanding and help produce good outcomes.
“People are taking more notice of their finances as a result of digital enhancements, and we need to tap into this and inform them of their investment performance that way. This can be so much more tailored and engaging, giving them the context and assurances they crave during volatile times.
“With this rule now consigned to history we must take this chance and put more of our energy into consumer engagement with their investments.”
