On 23 April 2024, the Financial Conduct Authority (FCA) published Consultation Paper 24/8 ‘Extending the Sustainability Disclosure Requirements regime to portfolio management’ (CP24/8). In CP24/8 the FCA sets out proposals to extend the Sustainability Disclosure Requirements (SDR) and investment labels regime to portfolio management services.

Background

On 25 October 2022, the FCA published Consultation Paper 22/20 (CP22/20) setting out proposals for a new anti-greenwashing rule and SDR and investment labels regime. In CP22/20 the FCA consulted on including portfolio management in the SDR and investment labels regime. On 28 November 2023, the FCA published Policy Statement 23/16 (PS23/16) in which it set out final rules and guidance for these measures. The anti-greenwashing rule applies to all FCA-authorised firms that make sustainability-related claims about products and services, while the SDR and investment labels regime applies to UK asset managers.  The SDR and investment labels requirements do not currently apply to portfolio management products and services. In PS23/16 the FCA reported that it had received feedback that its proposed approach for portfolio management would not be suitable, particularly as most portfolios are diversified and unlikely to invest only in UK funds with labels. Among the suggestions to address the matters raised were requests to allow portfolio managers to assess the assets within their portfolio against the criteria for labels – to follow a similar approach for portfolio management as was proposed for funds. The FCA stated that it would consult on proposals to follow a similar approach for portfolio management, with a focus on where portfolio management is undertaken for UK retail clients, including managed portfolios and discretionary wealth management services, in early 2024.

Scope

The proposals in CP24/8 will be of interest to firms providing portfolio management services. The FCA defines this in the consultation as a service provided to a client which comprises either managing investments or private equity or other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement, the predominant purpose of which is investment in unlisted securities. The proposed scope does not include services where the clients are based overseas (i.e., those that either normally reside outside of the UK or have their registered office (or head office) outside of the UK). It also does not include portfolio management provided to a client that is a fund, or an Alternative Investment Fund Manager or management company for or on behalf of a fund (i.e., where the portfolio manager acts as a delegate).

Proposals

The FCA proposes that firms providing portfolio management services are subject to a similar SDR and investment labels regime as UK asset managers. These proposals are covered in chapter 3 of CP24/8. They are also summarised in Table 1 in Annex 2 of CP24/8 and a comparison of the proposals against those in CP22/20 can be found in paragraph 2.6 of chapter 2 of CP24/8. A table providing a summary of the labelling criteria and considerations for portfolio managers is located in paragraph 3.23 of CP24/8.

Given that the SDR and labelling regime have been developed primarily for retail investors the FCA’s proposals to extend the regime are primarily aimed at wealth management services for individuals and model portfolios for retail investors. Firms offering portfolio management services to professional clients (or institutional investors) may also opt into the labelling regime.

Key elements of the proposals include:

  • Investment labels – The FCA is proposing to apply a broadly similar approach to labelling for portfolio managers as introduced for UK asset managers. This includes the introduction of a fourth label in response to comments about the mutual exclusivity of labels. The four labels are ‘Sustainability Focus’, ‘Sustainability Improvers’, ‘Sustainability Impact’, and ‘Sustainability Mixed Goals’. To use a label, portfolio management offerings must meet general and specific criteria relating to that label on an ongoing basis and prepare associated disclosures. The labelling criteria applies to the agreement or arrangement under which a firm provides portfolio management to a client. At least 70% of the overall arrangement would need to be invested in accordance with the sustainability objective, and other qualifying criteria would need to be met, for it to be considered for a label. Where clients want more than 30% of their arrangement to pursue only financial objectives, the portfolio manager would not be able to use a label but may be subject to the FCA’s naming and marketing rules. The portfolio manager is responsible for ensuring that the general and specific criteria are met. This includes where the management of any assets within the portfolio is carried out by a third party.
  • Naming and marketing rules – The FCA proposes that these rules apply only to portfolio management offerings that are marketed to retail investors. Sustainability-related terms can be used in names and marketing if: (i) 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 of the offering, or (ii) it does not use a label but complies with the naming and marketing rules, as set in CP24/8.
  • Consumer facing disclosures – The FCA proposes that portfolio managers must produce consumer-facing disclosures summarising the key sustainability characteristics for both labelled portfolio management offerings and those that use sustainability-related terms in their names and marketing. The disclosure must be provided in a new, standalone document, alongside other documents that provide key investor information. As with the approach for UK asset managers, the FCA is not proposing a specific template for the information but, to promote consistency, it has set out the categories of disclosures that firms would be required to make.
  • Product level disclosures – All portfolio management offerings using a label or using sustainability-related terms in their naming and/or marketing without a label must include sustainability information in: (i) pre-contractual disclosures by 2 December 2024 for products using the terms without a label, and (ii) ongoing product-level disclosures annually. For the ‘Sustainability Mixed Goals’ label, the disclosures must include the proportion of assets invested in line with each of the relevant labels, and the information required for those labels.
  • Entity level disclosures – As per the Task Force on Climate-Related Financial Disclosures and the International Sustainability Standards Board four pillars, firms with over £5 billion in assets under management (AUM) are required to make certain annual disclosures including their governance around sustainability-related risks and opportunities. Firms that use labels or sustainability-related terms in the names and marketing of their portfolio management offerings, must also include details on their resources, governance and organisational arrangements for them.
  • Distributors – The FCA proposes to keep the requirements for distributors the same as under the final rules for UK asset managers with regards to communicating the labels and consumer facing disclosures.

Next steps

The deadline for comments on CP24/8 is 14 June 2024.

The FCA plans to publish final rules in the second half of 2024.

The FCA proposes that the labelling and naming and marketing requirements, and the associated consumer-facing and pre-contractual disclosures, come into force on 2 December 2024. Firms will need to start producing ongoing product-level disclosures from one year later. Firms with AUM greater than £50 billion will need to produce entity-level disclosures by 2 December 2025.  Firms with AUM greater than £5 billion will need to start producing entity-level disclosures by 2 December 2026. Apart from the start date for labelling and the associated disclosures, these dates are consistent with the measures for UK asset managers.