Portfolio 10% drop rule from MiFID II to be scrapped from next year

The contentious ‘10% drop rule' relating to clients' investment portfolios first introduced in 2018 will be scrapped from next year, the UK government has confirmed.

The rule - Article 62 in the Markets in Financial Instruments Directive - means clients must be informed by the end of the working day if their portfolios have dropped 10% or more in a certain period.

AJ Bell Investcentre head of marketing Mark Rendle says the news, confirmed by HM Treasury today (12 December), will be welcome for advisers.

"2023 will witness the removal of one of the least effective pieces of regulation in the book," he stated. "It was designed to ensure customers who had lost touch with their investments over the years would be re-engaged, but for those already well-served by advisers, the notice only create increased levels of administration."

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Rendle said the other cost to advisers had been the increase in anxiety the compliance with the rule had caused.

"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 explained.

Rendle added that the rule had also indirectly encouraged concerning "knee-jerk responses".

"It also created a distraction for discretionary fund managers, platforms and advisers at critical times when their efforts and attention could be more usefully focussed elsewhere," he said.

Quilter commercial and propositions director David Tiller agreed the scrap is "long overdue" and comes after the regulator's admission the rule is "not fit for purpose".

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However, he warned the change was not an open door for an advisers to lower their standards of communication.

"Doing so would be a complete dereliction of duty," he stated. "This is where the Consumer Duty will 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."

Tiller concluded: "With this rule now consigned to history, we must take this chance and put more of our energy into consumer engagement with their investments."