Ukraine – 10% drop reporting

The current hostilities in Ukraine have caused significant market drops and may continue to do so. Accordingly, a reminder about the 10% drop reporting requirements is timely.

 

Readers will recall the early days of the Covid pandemic in 2020 caused a period of market volatility that necessitated issue of 10% drop notifications to clients. It became clear that these appeared to be creating more anxiety than clarity for investors in addition to creating a substantial additional workload for firms. As a result, the FCA adopted temporary coronavirus (Covid-19) measures on the requirement for firms to issue 10% depreciation notifications to investors under COBS 16A.4.3, primarily applying greater supervisory flexibility on firms’ ongoing compliance with the requirement so long as certain criteria were met. That more flexible position remains, having been further extended to 31 December 2022. The conditions for the reduced reporting are as follows …

The FCA will not take action for breach of COBS 16A.4.3 UK for services offered to retail investors provided that the firm has:

  • issued at least one notification in the current reporting period, indicating to retail clients that their portfolio or position has decreased in value by at least 10%
  • informed these clients that they may not receive similar notifications should their portfolio or position values further decrease by 10% in the current reporting period
  • referred these clients to non-personalised communications, perhaps made available on public channels, that outline general updates on market conditions (these could contextualise 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

Having initially deferred moving from the temporary measures because of the Covid situation, the current extension to 31 December 2022 is to enable Her Majesty’s Treasury (HMT) to carry out policy work on the future of the requirement as part of its Wholesale Markets Review (WMR). Findings from the WMR have indicated support for removing or amending the requirement.

Who has reporting responsibility?

The relevant rule is COBS 16A.4.3. This identifies two types of firm that have the 10% reporting responsibility.
  1. Investment firms providing the service of portfolio management …
    … shall inform the client where the overall value of the portfolio, as evaluated at the beginning of each reporting period, depreciates by 10% and thereafter at multiples of 10%, no later than the end of the business day in which the threshold is exceeded or, in a case where the threshold is exceeded on a non-business day, the close of the next business day.
  2. Investment firms that hold a retail client account that includes positions in leveraged financial instruments or contingent liability transactions …
    … shall inform the client, where the initial value of each instrument depreciates by 10% and thereafter at multiples of 10%. Reporting under this paragraph should be on an instrument-by-instrument basis, unless otherwise agreed with the client, and shall take place no later than the end of the business day in which the threshold is exceeded or, in a case where the threshold is exceeded on a non-business day, the close of the next business day.
Note that it is unlikely that the adviser firm will have the reporting responsibility in most cases.  However, even if the markets do not hit the 10% threshold and the firm has no strict responsibility to report, it would be prudent for firms to consider how and when to communicate with clients about the current situation and its possible impact on the client’s investments. Regular contact with clients at times like these is likely to be welcomed by the client.

 

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

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