10% drop rule ripped up by government

‘Detrimental’ regulation abolished as part of chancellor’s Edinburgh reforms

Chancellor of the exchequer Jeremy Hunt
Copyright: HM Treasury/Flickr


Regulation requiring firms to notify retail clients of a 10% decline in their portfolios is due to be scrapped next year.

The amendment to article 62 of the Mifid II regulations– known as the 10% drop rule – was announced as part of chancellor Jeremy Hunt’s (pictured) ‘Edinburgh reforms’, which saw wide-ranging amendments to financial services regulation.

The FCA had paused the rule at the beginning of the Covid pandemic to help firms support consumers during market volatility linked to Covid-19 and the Brexit transitional period. The reinstating of the rule was then deferred while a consultation took place around its future.

David Tiller, commercial and propositions director at Quilter, said: “Ditching the 10% rule is long overdue and has always had the capability of being detrimental to customer investments by breeding the exactly wrong sort of behaviour we would expect from long-term investors.

“The regulator [FCA] 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.”

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