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Jessica Reed, Farrer & Co
Jessica Reed, Farrer & Co

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SDR regime extended to portfolio management and final anti-greenwashing guidance

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Jessica Reed, Partner, and Kya Fear, Senior Associate, Farrer & Co write that 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 are primarily aimed at wealth management services – both bespoke and model portfolios – for retail clients, and is similar to those already consulted on for fund managers.

Key points for portfolio managers

The proposals apply the SDR and investment labels regime to all forms of portfolio management services, including model portfolios. The FCA is also seeking to extend the scope to include customised portfolios and/or bespoke services, which may be challenging for firms given such portfolios are constructed after the service has been selected and can include exclusion overlays which may bring them in scope of naming and marketing rules.

The implementation timetable has been aligned to that of fund managers. The FCA intends to publish the final rules in the second half of this year, with the rules coming into force on 2 December 2024, and the first disclosures due for in-scope firms one year later.

Clearly, this is an extremely short lead-in time for a major piece of regulation, and much shorter than the timeline originally anticipated for portfolio management firms.

Although the FCA implies that portfolio managers want rules implemented quickly given that some portfolios are structured similarly to funds, we expect industry to push for at least a six-month extension.

As with the rules for funds, discretionary services for professional clients are not excluded altogether 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.

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 AUM greater than GBP50 billion will need to produce entity-level disclosures by 2 December 2025.

·       Firms with AUM greater than GBP5 billion will need to start producing entity-level disclosures by 2 December 2026.

Under the original proposals, 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.  Following extensive pushback on this point, the FCA is now proposing to reduce the threshold to 70 per cent, which is in line with the rules for funds.

The FCA are now proposing that all portfolio management offerings to retail investors will be subject to the naming and marketing rules. Although portfolio managers offering services to professional clients are not subject to the naming and marketing rules, the anti-greenwashing rule still applies.

It is proposed that portfolio managers will be subject to the same requirements as fund operators – 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.

Next steps

Firms wishing to respond to the consultation must do so by 14 June 2024. They will need to consider which of their products and services may be in scope of the new rules and update their marketing materials as appropriate.

It is currently anticipated that firms must start producing product level disclosures one year after the rules come into force, 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), and so firms will also need to start preparing for these as soon as possible.

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