The FCA publishes its consultation paper on the extension of the Sustainability Disclosure Rules to Portfolio Managers

Background

On 23 April 2024, the FCA published a consultation Paper (CP24/8) on extending the Sustainable Disclosure Requirements (and discussed in our previous alert) to portfolio management services (the Consultation).

The proposals in the Consultation are largely aimed at wealth management services provided to individuals and model portfolio services for retail investors and include four voluntary investment labels, naming and marketing rules based on the sustainability characteristics of the product or service, and related product and entity disclosures. It applies to portfolio managers “established” in the UK. Portfolio managers that offer portfolio management services to professional clients can opt into the labelling regime, but the naming and marketing rules and the associated disclosures are not intended to apply to communications to them.

The consultation period will close on 14 June 2024. The final rules will be published later this year. The extended regime, if implemented, will come into force on 2 December 2024, to align with the implementation timetable applicable to fund managers pursuant to the FCA policy statement, PS23/16.

 

Scope

The FCA intends to extend the SDR to portfolio management services (including portfolio management offerings and model portfolios, customised portfolios and/or bespoke management services). This will also capture private equity or other private market activities such as advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement, the predominant purpose of which is to invest in unlisted securities. As noted above, the extended SDR regime are principally focussed on wealth management services for individuals and model portfolios for retail investors, with firms providing portfolio management services to professional clients will be given the option to opt into the labelling regime.

The extended regime will not apply where portfolio management services are provided to clients based outside the UK (voluntary opt in appears to be ruled out) and to delegated portfolio management services provided to funds, AIFMs, or UCITS ManCos on behalf of a fund.

Broadly speaking, there are three sets of requirements applicable to portfolio managers under the extended application of the SDR, namely: labels, the naming and marketing rules, and disclosures. Each applies to a different sub-set of portfolio managers as follows:

• Sustainability Labels: in-scope portfolio managers when providing services to retail and professional clients.
• Consumer facing disclosures: in-scope portfolio managers when providing services to retail clients which use a sustainability label or sustainability related terms only.
• Product level disclosures: portfolio managers with retail and/or professional clients, for products which use a sustainability label or sustainability-related terms in their naming or marketing.
• Product level disclosures: portfolio managers with retail and/or professional clients, for products which use a sustainability label or sustainability-related terms in their naming or marketing.
• Entity-level disclosures: portfolio managers with assets under management in excess of GBP5 billion.
• Naming and marketing rules: in-scope portfolio managers when offering services to retail clients.

It is fair to say that the intended application of the rules is not entirely straightforward, and firms will be required to undertake a detailed analysis to fully understand, if and how, the rules will apply.

 

Sustainability labels

The SDR includes a labelling regime for those products seeking positive sustainability outcomes. There are four labels available: Sustainability Focus; Sustainability Improvers; Sustainability Impact; Sustainability Mixed Goals.

The labels are not intended to be hierarchical. They are designed to inform customers and investors and encourage the flow of capital to transparent and credible sustainability outcomes. Naturally, although they are not intended for them, the labels will also inform the decisions of professionals and institutional investors and clients, who will examine the data “beyond” the label in their asset selection process. To some extent, it is inevitable that retail and professional investors alike will begin to express a preference for certain labels, creating an incidental “hierarchy”.

Before a label can be applied to a portfolio, there are some general criteria which must be met, at both product and firm level. Please see our previous alert for further details on these general criteria, and on the criteria for the application of the labels themselves.

Following feedback from market participants, the Consultation confirms that portfolio management offerings will be able to 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, and the other qualifying criteria are also met.

The Consultation clarifies that whether a portfolio management offering invests in funds or directly in securities, those funds or securities will both be treated as “assets”. This suggests that there will be no “look through” approach to the underlying assets of funds – i.e., the “fund” will be assessed holistically as a single asset, rather than being analysed by reference to its constituent investments.

 

Disclosures

The SDR introduces the following four types of sustainability-related disclosures:

• Consumer-facing disclosures.
• Pre-contractual product-level disclosures.
• Periodic product-level disclosures.
• Entity-level disclosures.

Consumer facing disclosures:

Following feedback to the previous Consultation, the FCA is proposing that firms providing portfolio management services should produce their own consumer-facing disclosures, if using a label, or if using sustainability-related claims in their product’s name and marketing material.

Consumer-facing disclosures must be published on the website (or relevant digital medium) and provided to the client. Consumer-facing disclosures will only be required where the product is marketed to retail clients. Naturally, firms must also consider their consumer-facing disclosures in the context of the Consumer Duty requirements; particularly, disclosures will be assessed under the “Consumer Understanding” outcome, and although the FCA has not provided a template, they have confirmed that disclosures should be limited to two pages.

Pre-contractual product-level disclosures:

All portfolio management offerings using a label or sustainability-related terms in their naming and/or marketing material must include sustainability information in pre contractual disclosures by 2 December 2024 and ongoing product-level disclosures, annually.

The rules differ for portfolios using a label, and those which do not. The portfolios using a label must disclose information associated with the qualifying criteria for that label, including an explanation of how the portfolio manager determines the assets the portfolio invests in, including the robust evidence-based standard of sustainability that it uses. Where a label is not used, the disclosure must include information relating to the investment policy and strategy and any relevant metrics.

Disclosures must either be made publicly available in a prominent place on the relevant digital medium where the product is offered or provided to the client directly. Where portfolio managers do not make information publicly available (such as in the case of bespoke offerings), they must provide the relevant information directly to the client.

Entity-level disclosures:

Consistent with the requirements in the TCFD and ISSB’s four pillars, all firms with assets under management in excess of GBP5 billion are required to annually disclose:

• Their governance around sustainability-related risks and opportunities.
• The actual and potential impacts of sustainability-related risks and opportunities on their businesses, strategy, and financial planning.
• How the firm identifies, assesses, and manages sustainability-related risks.
• The metrics and targets used to assess and manage relevant sustainability-related risks.

Where firms use labels of sustainability related terms in the names and marketing material, they must also include details of their resources, governance, and organisational arrangements.

Helpfully, firms will be permitted to cross refer to disclosures made in group, parent level or other relevant reports.

Please see our previous alert for further details on the disclosure requirements.

 

Naming and marketing rules

It is proposed that the naming and marketing rules will be extended to portfolio management offerings to retail investors This will mean that sustainability-related terms can be used in the name and marketing material of the product if:

• The portfolio uses a label – provided that, where the “sustainability focus”, “sustainability improvers” or “sustainability mixed goals” labels are used, the word “impact” is not used in the name or the offering; or
• It does not use a label but complies with the broader naming and marketing rules.

Portfolio managers must comply with the following rules:

• The portfolio management offering must have sustainability characteristics, and its name must accurately reflect those characteristics. However, if the portfolio offering is not using a label, it must not use any of the label terms, such as “sustainable” or “impact”, or any iteration of those.
• Firms must produce the same types of disclosures as required for labelled products. If the product does not have a label, the firm must produce a statement to clarify that the offering does not have a label and the reason why, and either publish the statement or provide it to the retail investor.
• Firms must ensure that financial promotions relating to a product offering are consistent with its label and associated disclosures.
• Where a firm does not use a label for a portfolio management offering, but are using sustainability-related terms, they must produce the same types of disclosures and statements as those required under the naming rules.

These proposed naming and marketing rules are consistent with the rules that apply to fund managers. The FCA are proposing to apply the same conditions to portfolio managers marketing to retail investors, so that there is consistency across products marketing to those investors.

 

Timing

The Consultation confirms that portfolio managers will be brought into scope for the label rules, consumer-facing, pre-contractual, and product specific disclosure rules, and naming and marketing rules on 2 December 2024.

The FCA considers that this accelerated timeline for portfolio managers allows for a market-wide, consistent approach, and levels the playing field. This will allow portfolio managers to participate in the same ecosystem as fund managers, some of whom are competitors due to similarly structured and marketed products.

 

Practical implications

Firms should consider:

• Whether they wish to respond to the Consultation.
• The extent to which they and their managers are in scope of the extended proposals.
• What information and data requires to be disclosed at consumer, product, and entity level, and the information gathering process which must be undertaken in order to comply.
• The extent to which labels may be applied to existing products, and whether future products may benefit from a label, and any product redesign which might be required to permit this.