FCA ‘closes loopholes’ with introduction of fourth label under SDR but further clarification needed

Seb Beloe, partner and head of research at WHEB Asset Management, praised the regulator for the introduction of a fourth label – the Sustainability Mixed Goals category, aimed at funds investing across different sustainability objectives and strategies – arguing it has managed to close “fund labelling loopholes” by doing so.

The UK Sustainable Investment and Finance Association (UKSIF) agreed, with CEO James Alexander arguing the final rules “address concerns often raised by savers over their funds’ sustainability claims and profile”.

The rules also provide a degree of flexibility for asset managers, noted Richard Monks, UK sustainable finance partner at EY, which means “firms will need to make their own judgements about labels, disclosures and data, and anticipate end-consumer outcomes – all of which come with their own challenges”.

FCA unveils final SDR rules including fourth ‘Mixed Goals’ label for ‘blended strategies’

He pointed to the anti-greenwashing rules, which will be subject to consultation until 26 January 2024, before coming into force on 31 May 2024.

Although the FCA had previously expected the anti-greenwashing rules to be implemented shortly after the publication of the SDR final rules, Monks argued the six-month implementation period reflects “the complexities that firms face in managing this risk”.

But Lora Froud, investment management partner at Macfarlanes, highlighted there are still areas within SDR that need further clarification.

“It is not yet clear how and whether the SDR will apply to overseas funds, portfolio management and pensions products, although there will be consultations on these topics,” she said.

The FCA explained it will consult on the applicability of SDR rules to portfolio managers and financial advisers since, for the time being, only asset managers will be bound by the labelling rules, while all authorised firms will need to comply with the anti-greenwashing provisions.

SDR has consumer at its heart but adviser role is now key

Iona Silverman, partner and greenwashing lawyer at Freeths, took a more critical view, arguing that other regulators – such as the Competition and Markets Authority and the Advertising Standards Authority – are “much further advanced” in their regulation of greenwashing in consumer-facing advertisement.

She pointed to the CMA’s Green Claims Code and the ASA’s frequent rulings on what constitutes misleading ‘green’ advertising, adding the FCA “needs to up its game and do much more to reassure investors that they are making the right choices”.

Similarly, WHEB’s Beloe urged the regulator to go further in encouraging transparency within fund management, arguing its efforts for greater disclosures should not stop at the sustainable investment sector.

He said the FCA should, for instance, “move beyond published top ten holdings on fund factsheets to give a deeper and clearer picture of a fund’s underlying investments”.

FCA consultation closes: Respondents raise concerns over SDR labelling proposals

Yet Jessica Reed, partner, financial services, at Farrer & Co, said it was “highly encouraging” to see the regulator had listened to industry concerns, as the final rules have been “improved to enable firms to promote non-labelled funds with ESG characteristics”, something that was not included in previous consultations.

“We see many asset managers who are incredibly dedicated to ensuring that ESG factors form a solid part of their investment strategies, and it is important that they are able to highlight this work when they promote their funds, even if those funds do not use an investment label,” she added.

On the international front, UKSIF’s Alexander called on the FCA to continue to closely engage with regulatory authority in overseas markets to “positively shape jurisdiction’s approaches and fund labels and promote international harmonisation”.