The Government is set to consult on scrapping the 10% drop rule for retail clients after making a decision to revoke it for professional clients.
In a memorandum to Parliament, the Treasury said feedback from professional clients had found that they and investment firms would prefer to be allowed to agree between them what reporting is appropriate based on specific circumstances.
The government now plans to consult whether this change should be extended to retail clients as well.
The Financial Conduct Authority had put the ruling, which requires financial advisers to notify clients when their investment portfolio has fallen by 10% or more in any given reporting period, on hold for retail clients since September 2020 following the pandemic-induced market volatility.
In March this year, the regulator announced that it would review the rule, while extending its suspension until the end of 2021.
Steven Levin, chief executive of Quilter Investors, said the consultation had been “a long time coming.”
Levin said: “The fact the rule has been ‘paused’ for so long now shows that it really wasn’t working and removing it for retail clients along with professional clients would be a victory for common sense.
“Last year saw a period of unprecedented market volatility, the exact conditions the rule was designed for. Rather than helping clients it was a hindrance and the FCA righty stepped in to put a pause on the need to issue the notification.
“For starters, the rule was actually extremely hard to put into practice. Deciding what constitutes a 10% drop seems simple enough, but in actual fact it is a complex calculation, and one which is not helped by a lack of consistency in what the rule actually covers.”
Levin warned that the rule also has the potential to encourage bad outcomes, with people likely to panic in response to the 10% drop and lock in their losses.
Levin added: “The fact the regulator has already changed the rules, which originated as part of EU’s MiFID regulations, suggests that the 10% drop notification is not fit for purpose and it’s about time the rule was scrapped once and for all.”
