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FCA suspends 10% drop-letter rule

Chris Hamblin, Editor, London, 1 April 2020

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In a 'Dear CEO' letter to retail financial firms, the UK's Financial Conduct Authority has made a concession that ought to save wealth management firms a good deal of expense.

The FCA has notified CEOs that firms that provide portfolio management services or hold retail client accounts that include "leveraged investments" are no longer required to inform investors when the values of their portfolios or "leveraged positions" fall by 10% or more compared with their value in their last periodic statements and for each subsequent 10% fall in value.

The FCA has no intention of taking enforcement action if a firm:

  • has issued at least one notification to a retail client in a current reporting period which indicates that his 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, impersonal communications that clients can read. These communications should keep clients up-to-date about market conditions, explain how clients can check the values of their portfolios and invite clients to contact the firm if they wish; or
  • chooses to cease providing 10% depreciation reports for any professional clients.

The FCA will take this approach for 6 months, ending on 1st October. The letter refers CEOs of firms to the rule COBS 16.4.3, which states: "In cases where the portfolio of a client includes the proceeds of one or more unsettled transactions, the information in a statement provided under this section may be based either on the trade date or the settlement date, provided that the same basis is applied consistently to all such information in the statement."

This is the nearest that the UK has come to a 'no-action' letter of the type that is so common in the United States.

The FCA says that it has received hundreds of letters in which firms and trade bodies ask for relief from some of their onerous responsibilities, doubtless including this one. Before making this concession to help them, the FCA had to consult the European Securities and Markets Authority.

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