What’s Consumer Duty got to do with the new Sustainability Disclosure Requirements (SDR) and investment labels rules? Far more than you imagine, says Lee Coates, director of ESG Accord.
You can hear more from Lee on SDR, Consumer Duty and suitability at our Investment Committee Seminar on 28 February in London. Find out more and Register here.
Consumer Duty (CD) aims to deliver good client outcomes, and SDR sits under CD cross-cutting with other rules such as PROD and COBS. So, what is ‘SDR’?
PS23/16, released on 28/11/2023, delivers a set of rules for investments with sustainability-related objectives and characteristics and introduces, for the first time, investment labels; Sustainability Improvers, Sustainability Focus, Sustainability Impact and Sustainability Mixed Goals.
These labels are clearly defined and enable advisers and paraplanners to differentiate between sustainable investment options. The PS also introduces the anti-greenwashing rules which apply to EVERY FCA regulated firm. Any reference to sustainability-related terms in any FCA regulated area must go through an anti-greenwashing check. This runs parallel to the fair, clear and not misleading requirement which was strengthened under Consumer Duty.
The Labels
Funds investing with sustainability objectives can use one of the new labels and must then abide by the disclosure requirements. This is where it gets interesting for paraplanners. The current smorgasbord of fund names and strategies makes it difficult to map across to client investment objectives (as per CD’s ‘informed choice and investment preference and objectives’). Paraplanners can link client objectives to one of the four sustainability labels. How funds interpret a label is their USP, but labelled funds are subject to significant new disclosures; how they do what they do, their KPIs and more information about processes and outcomes.
Alternatively, funds with some sustainability characteristics will be allowed to use sustainability related terms without applying for a label. These funds will also be subject to disclosure requirements almost as comprehensive as labelled funds
Paraplanners will find it easier to compare different propositions by comparing like-with-like. If an adviser documents that a client has chosen a Sustainability Focus strategy, you will only need to compare funds with this Label.
Anti-greenwashing
Sustainability claims made by investment funds, mortgage lenders, financial advisers and other regulated firms need to run through a process of checking and verification. All claims made for a product or service must be backed up by data/information and disclosed.
For paraplanners, it will be essential to pass all suitability letters with sustainability recommendations through an anti-greenwashing check. This will ensure that any claims made in the suitability letter are fair, clear and not misleading, as well as meeting the anti-greenwashing requirements.
The key dates for 2024:
31/5/2024: The FCA proposes that the anti-greenwashing rules commence. This means all firms must have a process in place to run anti-greenwashing checks to meet both SDR and CD requirements. Competence training will need to be in place before this date.
31/7/2024: Sustainability Labels can be used by FMs. Paraplanning firms will need to have a due diligence process in place to review funds under each of the labels. Paraplanning support firms will need to make sure that their financial adviser clients are having conversations about funds with sustainability characteristics and objectives with EVERY client, as part of the spectrum of capital. This is essential to meet both CD and SDR rules.
2/12/2024: Funds which are not applying for a label but are using sustainability terms in the naming or marketing have full disclosure and reporting processes in place
In future articles I will look in much greater detail at the areas of anti-greenwashing, labels and the impact on financial advice.
Lee Coates is a director at ESG Accord Ltd. A free to access compliance framework for advice on ESG/Sustainability is available to all advisers and paraplanners at www.accordinitiative.com
You can hear more from Lee on SDR, Consumer Duty and suitability at our Investment Committee Seminar on 28 February in London. Find out more and Register here.
