The Treasury is consulting on whether to axe the 10% drop rule which requires advisers to write to clients if their portfolios drop by 10% or more.

The 10% drop MiFID II rule was suspended during the beginning of the pandemic as markets swung wildly.

In an Explanatory Memorandum to the Markets in Financial Instruments (Capital Markets) (Amendment) Regulations 2021 No. 774 the Treasury sets out plans to drop the rule permanently for retail clients after dropping it for professional clients.

The Memorandum includes a number of measures which would water down some of the MiFID II rules which the Treasury believes may be unnecessary and factors increasing costs and red tape for firms.

The Memorandum says: “The purpose of the instrument is to alleviate regulatory burdens on certain financial services firms, notably by removing unnecessary reporting requirements.”

On the 10% drop rule the Memorandum says: “The instrument amends an existing requirement for investment firms providing portfolio management services to inform their client whenever the overall value of the portfolio depreciates by 10% and thereafter at multiples of 10%.

“Feedback from professional clients has been that having these reports every time their portfolios depreciate by multiples of 10% is not useful to them. They and investment firms would prefer to be allowed to agree between them what reporting is appropriate based on their specific circumstances. The instrument therefore revokes this obligation in respect of professional clients. The government plans to consult on whether this change should be extended to retail clients as well.”

Steven Levin, chief executive of Quilter’s platform and Quilter Investors, said: “It’s been a long time coming, but it seems the government has finally woken up to the illogical 10% drop rule and will consult on scrapping it for retail clients. The fact the rule has been “paused” for so long now shows that it really wasn’t working, and removing it for retail clients along with professional clients would be a victory for common sense regulation.

“Last year saw a period of unprecedented market volatility, the exact conditions the rule was designed for. Rather than helping clients, it was really a hinderance and the FCA rightly stepped in to put a pause on the need to issue the notifications.”

Mr Levin said the rule was “actually extremely hard to put into practice” because complex calculations were required. He also said it was potentially encouraging bad outcomes by scaring investors into taking rash action when their investments fell.