FCA extends SDR to portfolio management services

24 April 2024

The Financial Conduct Authority has published proposals to extend the Sustainability Disclosure Requirements and investment labels regime to portfolio management services.

It follows the Watchdog’s Consultation Paper and Policy Statement on SDR and investment labels, published last November, which introduced a package of measures for fund managers.

The raft of measures, designed to “improve trust in the market for sustainable investments”, includes an anti-greenwashing rule for all FCA-authorised firms and for asset management firms as well as four voluntary investments labels, and new rules for firms marketing investment funds based on their sustainability characteristics and associated disclosure requirements.

The FCA said the changes will help to minimise greenwashing and protect consumers from the associated harms; increase provision of standardised sustainability information along the investment chain and help consumers to more effectively navigate the market and make informed decisions.

Gemma Woodward, head of responsible investment at Quilter Cheviot, called the extension “the logical next step” in the process and said having consistency across the investment landscape will be critical if the SDR labels are to be a success.

“Portfolio management services, be that model portfolios or bespoke offerings, have become increasingly popular in the last decade. While the burden will now increase on those providers, it is important consumers and advisers can accurately compare services and that there is a level playing field for sustainable offerings. This will be particularly interesting for bespoke offerings which should reflect the customer’s requirements,” Woodward said.

However, Woodward said the regulation will require “careful navigation”, and will require additional clarification on what can and cannot be said, particularly around the naming and marketing of funds and portfolios.

“For advisers, this underscores the importance to be up to speed and trained in this area of investments. Clients will increasingly be asking about or for sustainable related investments and as such the advice industry needs to have the confidence and skills to have those conversations. The FCA is working with advisers to help open these communication channels but more needs to be done by everyone given the rules will come into force imminently. Given the rise of model portfolios, this gives advisers another good opportunity to review their practices around sustainable investment,” she added.

Lee Coates, director of ESG Accord, also welcomed the move.

“I am excited to see that portfolio management services, which includes MPS of course, will be subject to the same rules as fund managers. This makes for a level playing field and easier for advisers to compare and contrast different investment options,” Coates said.

The FCA has also finalised its anti-greenwashing rule, putting in place clear guidelines for how asset and wealth managers should communicate the environmental, social and governance credentials of their portfolios.

Woodward said: “This is a clear extension of the things like the Consumer Duty, where the FCA is putting a high bar on customer understanding. It is likely the FCA will police this effectively in the early days to ensure compliance is high and, as such, providers will need to review and update their marketing if they have not already done so.”

Professional Paraplanner