While new rules FCA around disclosure in relation to sustainability do not affect adviser firms as yet, paraplanners should have an awareness of them, recommends Steve Bailey, director ATEB Consulting.
Regular readers of our articles will be aware that the EU has introduced a series of rules and requirements around ESG funds and sustainable finance. The rules included an obligation for advisers to consider clients’ ESG preferences when providing a personal recommendation.
With the UK’s exit from the EU, the FCA announced that it would not be implementing that rule but would instead consult on this whole area before implementing any new rules for UK based firms. That remains the position at the time of writing.
The FCA has published Discussion Paper DP21/4, describing its current thinking around making sustainable investment transparent and safe for investors, for example, creating more consistent labelling of funds and preventing ‘greenwashing’. The part played by financial advisers is referred to in the paper as follows:
“… we recognise the important role that financial advisers play in providing consumers with sufficient information to assess which products meet their needs. We are also exploring how best to introduce specific sustainability-related requirements for these firms and individuals. Building on existing rules, a key aim will be to confirm that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. We will develop proposals on this in due course, working with Government.”
It is clear, from this statement that new rules for advisers should not be expected anytime soon. However, we would remind readers that there are already applicable suitability rules. As we stated in our April 2021 article (link below):
“Advisers have escaped the mandatory requirement to ‘take account of’ the ESG preferences of clients that would have come with the EU rules had the UK remained a member. But that should not and does not negate the need to recognise that the job of the planner has always been to ‘take account of’ all relevant information when advising a client. Client preferences in relation to sustainable investments should be identified and addressed. This has always been a suitability requirement since regulation began all those years ago.”
You can read our previous articles describing the position here and here.
New disclosure rules
And so we come to the new rules referred to in the headline to this article. Even though they do not directly affect advisers, it is appropriate to have an awareness of what is changing.
Background
The FCA published policy statement PS 21/24 in December 2021 including finalised new climate‑related disclosure rules that apply to asset managers, life insurers and FCA regulated pension providers Other rules apply to other types of organisation (e.g. occupational pension schemes) and need to be referred to separately. This is the culmination of consultations around how the financial services sector can support the UK Government’s sustainable finance initiatives that are intended to play a part in achieving net zero targets. The rules arose from work done by the Task Force on Climate Related Financial Disclosures (TCFD) which is the UK’s equivalent of the EU SFDR (Sustainable Finance Disclosure Regulation) which would have applied had the UK not exited the EU. Note that, although the objectives are similar, underlying methodologies are different.
The rules apply from 1 January 2022 for the largest in‑scope firms and 1 year later for smaller firms above the £5 billion exemption threshold. The first public disclosures in line with our requirements must be made by 30 June 2023. The largest asset management firms are those with over £50 billion in AUM and asset owner firms are those with assets over £25 billion. The rules are contained in the ESG sourcebook.
The types of firms in scope
The types of firms in scope are:
Asset managers:
- investment portfolio managers
- UK Undertakings for Collective Investment in Transferable Securities (UCITS) management companies
- full-scope UK Alternative Investment Fund Managers (AIFMs)
- small authorised UK AIFMs
Life insurers and FCA-regulated pension providers (collectively referred to as ‘asset owners’ in this PS):
- life insurers (including pure reinsurers) in relation to insurance-based investment products and defined contribution (DC) pension products
- non-insurer FCA-regulated pension providers, including platform firms and Self-invested Personal Pension (SIPP) operators, to the extent that SIPP operators provide a ready-made selection of investments
The thresholds
- £5 billion threshold for asset managers and asset owners. Note that the £5 billion threshold is calculated on a 3‑year rolling average basis, assessed annually, for both AUM and assets under administration. The assets to be included in the calculation are those related to the firm’s ‘TCFD in-scope business’ (as defined in the Handbook).
- £50 billion threshold for asset managers in implementation phase 1. This uses the same method of calculation as an ‘enhanced scope Senior Managers and Certification Regime (SM&CR) firm’ given that this is an already familiar method across the sector. We consider that this remains appropriate for the purposes of the transitional provision for asset managers. This method of calculation does not apply to asset owners or the £5 billion exemption threshold.
Asset managers and asset owners with less than £5 billion in AUM or administration (calculated on a 3‑year rolling average basis with respect to specified ‘TCFD in-scope business’) are excluded from these disclosure requirements. However, the FCA is ‘encouraging’ firms below the threshold to make voluntary disclosures or make preparations to enable disclosures when required.
Preparation for disclosure
PS 21/24 states:
“Firms that are directly affected should familiarise themselves with the details of the rules and associated guidance, and consider what arrangements they need to ensure that they are able to meet the requirements. We acknowledge that many larger firms are already making voluntary TCFD-aligned disclosures. In-scope firms will need to ensure their reports or cross-referenced reports meet our requirements. We recognise that the industry is still developing in terms of data, methodologies, and guidance.”
