The FCA’s consultation paper CP24/8 Extending the Sustainability Disclosure Requirements (SDR) regime to Portfolio Management, published on April 23, 2024, sets out the FCA’s proposals for how the requirements of SDR will be extended to apply to portfolio management.

The FCA is proposing to apply a broadly similar approach to labelling for portfolio managers as introduced for fund managers, to have a consistent approach and create a level playing field. Portfolio management services provided to retail which do not use a label will be subject to the naming and marketing rules and a disclosure regime, equivalent to that for funds will apply to portfolio managers using a label or subject to the naming and marketing rules. By extending the SDR and labelling package to portfolio management, the FCA aims to help consumers navigate the sustainable investment market.

This represents an evolution of the FCA’s thinking on the application of SDR to portfolio managers, which it first consulted on in CP22/20 Sustainability Disclosure Requirements (SDR) and investment labels. Strong market feedback to that consultation has caused the FCA to reconsider the proposals, which are now materially similar to the SDR applicable to funds.

It is interesting to note that the FCA has asked a lot of questions about the scope of the regime to gauge industry’s appetite for the SDR regime. It is unclear, however, how the FCA will deal with a lot of negative feedback to the proposals given the regime is due to come into force on December 2, 2024 and the final rules will only be published in the second half of 2024.

What do I need to know?

The proposals are intentionally similar to the SDR requirements applicable to funds to ensure a level playing field and will also need to be implemented on a comparable timetable which is very tight.

What is in scope?

Firms providing a broad range of portfolio management services to clients on a discretionary (and/or advisory in relation to private markets) basis, including where the firm is offering model portfolios, customized portfolios and/or bespoke portfolio management services (tailored to an individual customer’s needs and circumstances) will be in scope.

While the scope is broad, the proposals are primarily aimed at services and products provided to retail investors, such as wealth management services for individuals and model portfolios for retail investors.

Portfolio managers offering services to professional clients or institutional investors will be able to opt in to the labelling regime and its disclosure requirements, but will not be subject to the naming and marketing requirements and associated disclosures.

Services provided to clients outside the UK are not proposed to be in scope and neither are services provided from an establishment outside the UK. Neither are portfolio management services provided to a fund or fund manager, such as where portfolio management has been delegated by an AIFM or a UCITS ManCo.

What are the key features of the proposals?

Essentially the FCA is proposing to hold portfolio managers to the same standards as fund managers in respect of claims regarding sustainability.

• Labeling

Portfolio managers that want to use a label on their offering will need to comply with general and specific criteria relating to that label. These are broadly in line with the requirements applicable to the labeling requirements for fund managers, including the need for a sustainability objective, a robust evidence-based standard of sustainability, KPIs etc as well as disclosures to be made regarding how the portfolio qualifies for the label.

This represents a material change from the original proposals which included the provision that, to use a label, 90% or more of the constituent products in which a portfolio invested had to qualify for the same label.

• Naming

Portfolio managers will only be able to use sustainability-related terms in names or marketing if the portfolio (i) qualifies for and uses a label, or (ii) does not use a label but complies with separate naming and marketing rules. These include that the terms “sustainable”, “sustainability”, “impact” and any variation of these are not used and that the portfolio manager makes the same types of disclosures as are required when a label is used.

The portfolio manager will additionally have to clearly set out that the offering does not have a label and explain why.

• Marketing

If a portfolio management offering has a label, portfolio managers will need to ensure that financial promotions of that offering are consistent with the label and any associated disclosures. If an offering does not have a label, but uses sustainability-related terms or themes in financial promotions, the manager will need to include the same types of disclosure as are required under the naming rules.

• Disclosure

Product-level disclosures to consumers should be made in a new, standalone, two-page (if printed) consumer-facing disclosure (CFD) document, which will need to be reviewed and updated annually. Detailed pre-contractual disclosures will be required. These disclosures need to be public facing if the product’s other literature is similarly public – otherwise they must just be provided to investors.

All firms with assets under management (AUM) of more than £5 billion ($6.3 billion) will be required to annually disclose certain information about their governance and management of sustainability-related risks and the metrics and targets they use to assess and manage those risks.

• Distributors

Distributors, such as financial advisers and platforms, will need to communicate the labels used for portfolio management offerings and provide access to the associated disclosures. The FCA has established a working group for financial advisers to support advising customers on products making claims about sustainability.

When will these requirements come into force?

Portfolio management firms will be able to use labels from December 2, 2024 with the associated pre-contract disclosure rules, and the naming and marketing requirements, also applying from that date.

Ongoing product-level disclosures will need to be made from December 2, 2025, from which date entity-level disclosures will be required for firms with AUM of over £5 billion ($6.3 billion). Entity level disclosure rules will apply to all firms with AUM over £5 billion ($6.3 billion) from December 2, 2026.

In this way the FCA will quickly bring the portfolio management SDR in line with that applicable to fund management, recognising the desire by the market to implement the rules quickly, but with a down side being that fund managers will have had longer to prepare (especially for the labelling rules).

What steps should I take?

The consultation paper has significant practical implications for portfolio managers, who will need to adhere to materially the same SDR and labelling requirements as fund managers. This is intended to create a level playing field across the investment sector.

Portfolio managers should:

• consider if their products and services are in scope;
• ensure their products and services are compliant with SDR – by December 2, 2024 under the FCA’s current timetable;
• consider using the four voluntary investment labels;
• start planning for the potential impact of these changes on their operations;
• comply with the anti-greenwashing rule (AGR) and the guidance at the product and services level; and
  • if they make claims about their firm which can be considered to be part of the representative picture of a product or service, those general claims must meet the requirements of the AGR and the guidance too

Portfolio managers should respond to the consultation with their views and any concerns either directly or indirectly.

Next steps – SDR portfolio management consultation

Eversheds Sutherland will be responding to the SDR portfolio management consultation which closes on June 14, 2024. If you would like to respond to the consultation but do not want to submit your response directly, we can include your comments in our response on an attributed or anonymous basis.

The FCA plans to publish its final rules in the second half of 2024 and currently plans for those rules to come into effect on December 2, 2024.