FCA temporarily eases burden of MifID II “10% rule” reporting

In a follow-up to our earlier blog questioning the reason for discretionary managers to report immediately to clients whose portfolios have lost 10% of their value since the last regular quarterly valuation

02 April 2020

In a follow-up to our earlier blog questioning the reason for discretionary managers to report immediately to clients whose portfolios have lost 10% of their value since the last regular quarterly valuation, the FCA has responded to the increasing volume of criticism by relaxing the rules for what could be the duration of the coronavirus-induced volatility, ie until 1 October.

In a “Dear CEO” letter dated 31 March, Interim Chief Executive Christopher Woolard says the FCA “has no intention of taking enforcement action” against firms that don’t send out a letter for every 10% fall during a quarter, provided:

  • the firm has issued at least one such report to the (retail) client during the current quarter, and
  • it then provides general updates on its website, social media and/or generic client communications about market conditions, telling clients how to check their portfolio valuation and how to contact the firm, or
  • it ceases providing these 10% reports to professional clients.

As we have just started another quarter, clients will receive an updated valuation shortly, for those discretionary managers whose valuation cycle follows the calendar quarters.  Firms need to be ready to send out one report per client/model portfolio in the event of a 10% fall before the end of June and then need to keep clients informed more generally.

I can’t tell you what one coronavirus-triggered 10%-fall letter this quarter is going to tell clients that the two or three last quarter didn’t, but at least this goes some way to easing the burden on firms.

It is interesting – and positive – that the FCA has taken this action, as the requirement comes under the EU-wide MiFID II and the European regulator has been strict in the past on this rule being applied at every 10% threshold breached during the quarter.

Let’s hope that the horse has finally bolted and not returned to the stable before this door was closed, so we won’t have another intra-quarter fall of 10% before the markets start to recover.  Let’s also hope that the current situation convinces the regulators that there are better ways to inform clients of a fall in the value of their investments and they relax this rule permanently.