The Government is to scrap the 10% drop notification rule as part of The Markets in Financial Instruments Regulations 2022.
The 10% depreciation or drop notices require investors to be informed by advisers every time their portfolio drops 10%.
The rules have been criticised for unnerving investors and increasing paperwork for Financial Planning firms.
Critics had been calling for the notices to be dropped following temporary suspension of the rules during the Coronavirus pandemic, saying that the pandemic proved that the notices were not fit for purpose.
The FCA had extended the temporary measures allowing firms to opt out of sending more than one 10% depreciation notice in each reporting period until the end of this year.
David Tiller, commercial and propositions director at Quilter, welcomed the end of the 10% drop rule.
He said: “After much speculation the government has signalled that the end is nigh for Article 62 – also known as the 10% drop rule. 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 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.”
The Government is in the process of making wide-ranging changes to financial services regulation following Brexit.
On Friday Chancellor Jeremy Hunt announced what he’s called the ‘Edinburgh Reforms’ – major plans to shake up financial services to improve competition and growth.
He is planning a sweeping series of reforms to make the UK, “the world’s most innovative and competitive global financial centre.”
