The Financial Conduct Authority (FCA) published its Consultation Paper on 23 April that sets out its updated proposals to extend the Sustainability Disclosure Requirements (SDR) and investment labels regime to portfolio management.
The FCA proposals are primarily aimed at wealth management services for individuals and model portfolios for retail investors and are likely to be introduced relatively swiftly.
Who is in scope?
The proposal is to extend the SDR to firms providing portfolio management services in a broad sense, including services provided to clients that involve managing investments or "private equity, or other private market activities". The latter services consist of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement whose predominant purpose is investment in unlisted securities. The services are only in scope when they have been carried out from an establishment maintained by the portfolio manager in the UK.
The regime has been developed principally for retail investors. However, firms offering portfolio management services to professional clients or institutional investors can opt into the labelling regime. If so, they must either publish or provide the associated detailed disclosures to investors.
However, it is not proposed that portfolio managers offering services to professional clients be subject to the specific naming and marketing requirements, although the FCA's incoming anti-greenwashing rule will still apply to FCA authorised firms.
Who is not in scope?
The proposed scope of the proposals does not include services provided to funds, alternative investment fund managers (AIFMs) or management companies, such as where an AIFM has delegated portfolio management to a firm. Nor does it include services provided for overseas clients.
Extended SDR: elements and proposals
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Investment labels A broadly similar approach to that used for UK fund managers will apply to portfolio managers, with similar requirements. Firms can choose to use labels for portfolio management offerings where the objective is seeking to achieve positive sustainability outcomes, provided that the qualifying criteria for labels are met. For instance, one such criterion is that portfolio management offerings can use a label if at least 70% of the gross value of the assets within the portfolio are invested in accordance with the sustainability objective. |
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Naming and marketing rules The FCA proposes that only portfolio management offerings to retail investors are subject to the naming and marketing rules. |
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Consumer-facing disclosures Firms providing portfolio management services will be required to produce "consumer-facing disclosures". This is required for retail investors, where using a label or if any sustainability-related terms have been used in a product name or any financial promotions relating to the product. Sustainability-related terms are broad, and encompass any term that implies a product has environmental or social characteristics. The disclosures must be published; for example, on firms' websites or provided to potential investors. |
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Product-level disclosures Firms will be required to produce pre-contractual disclosures and ongoing product-level disclosures. Again, this is in respect of retail investors, where a label is used or if any sustainability-related terms has been used in a product name or any financial promotions relating to the product. Sustainability-related terms are broad, and encompass any term that implies a product has environmental or social characteristics. Disclosures must be published on their websites or similar, or provided to investors. Where firms do not make disclosures publicly available these must be provided to investors so they have a baseline of consistent information. |
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Entity-level disclosures Firms with £5 bn or more in-scope assets under management (AUM) providing portfolio management services are required to produce entity-level disclosures in relation to the overall assets managed in relation to sustainability in-scope business. |
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Distributor rules Distributors of portfolio management offerings will need to provide labels and consumer-facing disclosures to retail investors. |
Implementation timeline
The labelling and naming and marketing requirements will likely come into force on 2 December 2024, along with requirements for consumer-facing and pre-contractual disclosures. This is the same date as the naming and marketing requirements coming into effect for fund managers. The FCA noted in its proposals that this timeframe is based on industry feedback, with those consulted expressing a preference for being on the same timeframe as fund managers.
Firms will need to start producing ongoing product-level
disclosures on a phased basis from one year later. Firms will also
need to start producing entity-level disclosures, the deadline for
which will be dependent on their size:
" Firms with in-scope AUM £50bn or more will need to
produce entity-level disclosures by 2 December 2025.
" Firms with in-scope AUM £5bn to £50bn will need to produce entity-level disclosures by 2 December 2026.
The FCA's consultation will close on 14 June 2024, and the regulator aims to publish any updates to the draft rules in the second half of 2024.
Osborne Clarke comment
Portfolio managers had requested similar implementation timeframes as those that applied to fund managers, but the consultation does not provide a great deal of time for firms to prepare. Especially as the final rules are planned to be published in the second half of 2024, but come into force from 2 December 2024. Firms have little option than to consider how these proposals will impact them now, and start preparing on the basis that the final rules will not deviate substantially from the consultation.
It will be interesting to see whether sustainable portfolio managers with professional clients will consider using labels and whether the additional investment adjustments and compliance burdens would be justified in order to appeal for instance pension funds, many of which are subject to increasing pressure to be investing their own funds in a sustainable manner.
This Insight was written with the assistance of Tundun Basorun, Trainee Solicitor at Osborne Clarke.
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