FCA proposes extension of the SDR regime to portfolio managers

On 23 April 2024 the Financial Conduct Authority (FCA) published a consultation paper CP24/8 on extending the Sustainability Disclosure Requirements (SDR) regime to Portfolio Management. The proposals to extend the regime are primarily aimed at wealth management services for individuals and model portfolios for retail investors.

The implementation timetable has been aligned to that of fund managers, so the rules will come into force on 2 December 2024, which the first disclosures due for in-scope firms one year later.

It also published its finalised guidance FG24/3 on the anti-greenwashing rule, ahead of it coming into force at the end of May.

Background

The FCA’s original proposals for SDR, published in October 2022, included both UK funds and discretionary business within the scope of “sustainability products”, meaning that both fund operators and portfolio managers would have to apply the new rules.

However, the original proposals for portfolio managers were poorly received by industry. The FCA had proposed different thresholds for sustainability assets in labelled discretionary portfolios, leading to concerns about a lack of regulatory parity between different types of investment products. 

The FCA published its final rules on the SDR and investment labels in November last year,  along with its draft guidance on the anti-greenwashing rule. At this point the FCA carved out the proposals for portfolio managers. However, the regulator signalled that this was only to allow further consideration and said it intended to move quickly to bring portfolio managers into scope.

The FCA is now consulting on the extension of the SDR to portfolio management services.

Key points for portfolio managers:

• The FCA is proposing to extend the regime to portfolio managers by:
  
  • Widening the definition of “sustainability product” to include agreements or arrangements under which a firm provides portfolio management, unless the client is normally resident (or has its registered office) outside the UK or is a fund or fund operator, and
  • Including portfolio management in relation to a sustainability product within the definition of “sustainability in-scope business”.
• The proposals apply the SDR and investment labels regime to all forms of portfolio management services, including model portfolios, customised portfolios and/or bespoke services.
• As with the rules for funds, services for professional clients are not excluded from the scope of the rules. However, many of the rules (for example, those relating to naming and marketing), will only apply where the client is a retail client.
• The FCA intend that the labelling and naming and marketing requirements will come into force on 2 December 2024, along with requirements for consumer-facing and pre-contractual disclosures: the same date as these requirements go live for fund managers. The FCA has indicated that the tight timeframe has been based on industry feedback, with those consulted expressing a preference for being on the same timeframe as fund managers.
• Also consistent with the regime for fund managers, firms will need to start producing ongoing product-level disclosures from one year later, depending on their size:
  • Firms with Assets Under Management (AUM) greater than £50bn will need to produce entity-level disclosures by 2 December 2025.
  • Firms with AUM greater than £5bn will need to start producing entity-level disclosures by 2 December 2026.
• It was originally proposed in the 2022 consultation that portfolio managers would only be able to use a label if at least 90 per cent of the value of the products in which the manager invested met the criteria to use that same sustainable investment label. There was extensive feedback on this point, with managers arguing that most portfolios are diversified and would not be likely to only invest in UK labelled funds. The FCA is now proposing to reduce the threshold to 70 per cent in line with funds.
• The FCA are now proposing that all portfolio management offerings to retail investors will be subject to the naming and marketing rules. This is a change from the original proposals, which would have seen portfolios that invested over 90 per cent in labelled funds exempt from these rules.
• The previous proposals suggested that portfolio managers would not be required to produce consumer-facing disclosures. This has changed under the new proposals. Now, firms providing portfolio management services will be subject to the same requirements as fund managers. They will be required to produce consumer-facing disclosures in respect of retail mandates where they use a label, or where they use sustainability-related terms without a label. Similarly, pre-contractual disclosures and ongoing product-level disclosures will now be required for in-scope portfolio management services.
• The FCA reminds firms that although portfolio managers offering services to professional clients are not subject to the naming and marketing requirements, the anti-greenwashing rule still applies.

Publication of final anti-greenwashing guidance

The FCA has also published its finalised non‑handbook guidance on the Anti‑Greenwashing Rule (FG24/3) ahead of the anti-greenwashing rule coming into force on 31 May 2024. The FCA states that most of the feedback on the draft guidance was positive, and that feedback tended to relate to the examples given (including requests for a wider range to be provided) and requests for further clarity on its expectations.

The FCA reminds firms that the anti-greenwashing rule is intended to complement and be consistent with existing rules, including the requirement that firms ensure that their communications are fair, clear and not misleading, and, where applicable, the Consumer Duty. The new rule is also intended to be consistent with the Competition and Markets Authority (CMA)’s guidance on environmental claims and ASA guidance.

In response to feedback received, the FCA has amended the guidance to clarify that firms subject to the naming and marketing rules for asset managers under the SDR and labelling regime must comply with those rules in addition to the anti-greenwashing rule.

The FCA has also added in extra examples, but reiterates that the guidance is intended to be high level as it applies to all sectors. The FCA has also included an example to show that funds, and the broader financial sector, can support sustainability objectives though channelling finance to support net the zero transition.

Next steps

The consultation period for CP24/8 closes on 14 June 2024. The FCA is expected to publish the final rules in the second half of 2024 with the regime coming into force for both fund and portfolio managers on 2 December.

Firms will need to start producing product level disclosures one year later and entity level disclosures will follow the same phased timeline as has been confirmed for fund managers (first disclosures due 2025 or 2026 depending on a firm’s AUM).

All authorised firms should consider FG24/3 ahead of the anti-greenwashing rule coming into force on 31 May 2024.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, April 2024