MiFID II: FCA Publishes Regulatory Forbearance on the 10 Percent Depreciation Rule

By Carolyn H. Jackson, Nathaniel Lalone & Neil Robson on October 2, 2020

Posted in EU Developments, Financial Markets

On September 30, the UK Financial Conduct Authority (FCA) published a statement outlining an additional six month extension and amendments to a temporary coronavirus (COVID-19) measure regarding a requirement to notify investors of depreciations in the value of their account. The measure originally issued on March 31 and would have expired on September 30, but for the extension provided by the FCA.

Ordinarily, firms providing portfolio management services or holding retail client accounts with positions in leveraged financial instruments or contingent liability transactions are required under COBS 16A. 4.3 EU to inform investors where the value of the portfolio or leveraged position decreases by 10 percent or more compared to the value of the most recent prior statement. The FCA announced its intention not to take enforcement action against firms failing to comply with this notification requirement, provided certain conditions are met.

The FCA has extended this forbearance with several amendments. Accordingly, from October 1, the FCA will defer taking action against a firm for breach of COBS 16A.4.3 EU when offering services to retail investors, provided that the firm has:

issued a minimum of one notification in the current reporting period indicating to retail clients that their portfolio or position has decreased in value by at least 10 percent;
informed relative clients that they may not receive similar notifications should their portfolio or position values further decrease by 10 percent in the current reporting period;
referred clients to non-personalized communications, perhaps made available on public channels, that outline general updates on market conditions (these could contextualize potential drops in portfolio or position value to help consumers meet their objectives, rather than making impulse decisions about their investments); and
reminded clients how to check their portfolio value and how to get in touch with the firm.

The FCA has also amended the extension of flexibility regarding services offered to professional investors. From October 1, the FCA will not take any actions for breach of COBS 16A.4.3 EU against firms that have permitted professional clients to opt-in to receiving notifications.

The FCA’s statement is available here.