FCA relaxing 10% rule does not mean advisers can shirk duty to clients

Regular contact remains vital to prevent clients feeling investment manager has failed them


The industry has welcomed the Financial Conduct Authority’s decision to relax the 10% drop rule for the next six months, but Sanlam has warned the move does not mean advisers can shirk their responsibility to contact clients on a regular basis.

The regulator said on Tuesday it would suspend the rule until 1 October after receiving “hundreds of requests” from trade associations and firms concerned about how the measure will affect consumers and the operational burden at a time of highly volatile market conditions.

The rule, which is EU legislation and part of the Mifid II package of measures introduced in January 2018, makes it obligatory for discretionary investment managers to notify clients when the value of their portfolio, as evaluated at the beginning of each reporting period, drops by 10% and thereafter at multiples of 10%.

> See also: Andy Bell says coronavirus makes 10% rule like flagging a leaking shower on the Titanic

Sharp falls and bounces in global stock markets in recent week as a result of the coronavirus outbreak have brought the rule into acute focus. This is because investment managers, advisers and platform providers have found it operationally challenging to notify their client base of each 10% fall.

FCA eases pressure on advisers

But in a Dear CEO letter, the FCA said it will take no enforcement action where a firm:

– has issued at least one notification to a retail clients within a current reporting period, indicating their portfolio has decreased in value by at least 10%; and

– subsequently provides general updates through its website, other public channels (such as social media) and/or generic, non-personalised client communication; or

– chooses to cease providing 10% depreciation reports for any professional clients.

The FCA said: “In the last few days the UK, and the world in general, has faced an unprecedented set of circumstances linked to the coronavirus emergency which has created a challenging time for all firms, particularly small and medium sized firms.

“The impact of the pandemic affects the operational resilience of firms in this sector, with staff working from home in volatile market conditions. It also brings with it the need to protect consumers.”

Does not mean advisers can shirk duties

Sanlam head of UK intermediary distribution Lawrence Cook (pictured) said the move will be welcomed by many, but does not change the responsibility advisers have to regularly contact clients and respond to their concerns.

“The recent market falls will emphasise the benefits of financial planning not merely investing. When investing has no higher purpose or objective then any fall in value is seen purely in those terms and not in a wider context. In this situation a client with an investment objective of, say, 4% real returns could be forgiven for looking at their 30% fall and believing that their investment manager, or their adviser has failed them.”

Pimfa chief executive Liz Field praised the regulator’s stance, saying it shows the FCA has not only been in “listening mode” but has taken the concerns of its members seriously.

Field added: “To have done so at a time when the FCA’s resources are being stretched and it is being inundated with queries from firms is to its credit and today’s letter should provide much needed clarity. We have also raised the operational concerns many firms may have and the guidance provided by the FCA on how government schemes should be treated in order to maintain financial resilience is helpful.”

Royal London senior investment development and technical manager Ryan Medlock described the move as “sensible on several levels”.

“In the context of the current market turbulence relaxing this rule should ease one of the many burdens facing advisers right now,” he added. “It will also be of real benefit to clients who really don’t need to be bombarded with multiple letters to inform them their portfolio has dropped another 10% during these turbulent times.”

Investment pathways paused

The FCA has also announced a pause on the implementation of investment pathways which are designed to give non-advised consumers simple choices to help make better investment decisions in drawdown.

Aegon pensions director Steven Cameron said: “Many customers will simply not be able to identify right now with one of the four prescribed retirement objectives. We support pausing implementation until we have insights into how current events will affect consumer behaviour, both in terms on investment decisions and on how much income individuals may choose to take from drawdown.”


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