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MiFID Man’s guide to MiFID II: What if a portfolio value drops 10%?

The introduction of MiFID II in January (which is closing fast) represents a key moment in financial services regulation – and Zurich is here to help advisers prepare.

From the first Wednesday of next year, financial statements will no longer be issued bi-annually, but quarterly, and must be supplied via a ‘durable medium’ (thankfully, electronic archives such as a document library count). Where clients wish to continue receiving statements by post, that’s fine too.

Where client money is being managed on a discretionary basis, either by advisers or discretionary fund managers (DFMs), new safeguards under MiFID II mean investors must be notified if and when the value of their portfolio – or DFM holding – falls by 10%, and each subsequent 10% fall, since their last quarterly statement.

This may sound onerous, but how often might this really occur? If the new requirement had been in place for the last five years, a client wholly invested in the FTSE 100 would have been alerted of a 10% drop within a three-month period on only one occasion. Going back a little further, there would have been only 25 notifications since the start of 1984, with most of these activated around the 2001/02 and 2008 financial crises.

Keep an eye out for the dramatic headline, but keep everything in perspective.

A portfolio in the context of the MiFID regulations is the collection of all the assets being managed on a discretionary basis, not an individual fund. So on the Zurich Intermediary Platform, for example, we will be performing daily checks against each individual DFM model portfolio and also against all of our clients’ total holdings in their portfolio, including those not managed on a discretionary basis.

Those managing client money on a discretionary basis, advisers and DFMs, must notify clients within 24 hours of the fall, providing a revised valuation.

To support affected advisers using discretionary investment powers and DFMs to comply with their regulatory obligations, Zurich will send an alert to all advisers whenever a client’s portfolio or DFM model falls by 10% or more post the last valuation. At this point, we’ll send an updated valuation statement with a covering letter to the client where the drop has happened within the DFM model to enable the DFM to satisfy their obligations of notifying the client.

It is important to note that this alert does not satisfy an adviser’s obligation where they are using discretionary investment powers and they will need to contact their client and provide an adhoc statement from the platform.

It is also worth keeping in mind that this doesn’t just impact platforms. Many millions of pounds are managed directly through discretionary managers and these safeguards will impact them too.