UK: Portfolio Management and UK SDRs - what's the latest?

As it promised when releasing its policy statement (PS23/16) on the UK SDRs and labelling regime, the FCA has published a consultation paper on extending the regime portfolio management services. 

With the expectation that final rules will be published in the second half of 2024, and will begin to come into force from 2 December 2024, firms will need to begin their work now to get to grips with the proposed regime in order to meet the tight application timeline. 

UPDATED 03/05/2024:  you can find a recording of our 01/05/2024 webinar where we discussed the key implications of the proposals, and the steps firms should be thinking about now here.

Scope

The intention is to extend the SDR and labelling regime to all forms of portfolio management services (including where the portfolio management offering are model portfolios, customised portfolios and/or bespoke portfolio management services). The FCA’s proposal is to use the same definition of “portfolio management as under the TCFD rules – which means that services in relation to private equity or other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis would also be captured.

As the regime is focused on delivering outcomes for retail investors, the proposals are primarily aimed at wealth management services for individuals and model portfolios for retail investors. Firms offering portfolio management services to professional clients can opt into the labelling regime but will not be subject to the naming and marketing requirements and associated disclosures.

The proposed rules do not apply to services for clients based overseas (and it does not appear that the rules allow for an opt in, so do not allow scope to voluntarily apply the labels to services provided to non-UK clients) or to portfolio management provided to funds, AIFMs or UCITS ManCos on behalf of a fund.

The rules in more detail

The proposed labelling and Sustainability Disclosure Requirements (SDR) for portfolio managers is broadly in line with the rules introduced for fund managers in November 2023. This means that for those offering portfolio management services the following rules will apply:

• Product labels: It will be possible to use one of the four SDR product labels – Sustainability Impact, Sustainability Mixed Goals, Sustainability Focus or Sustainability Improvers – provided that general and specific criteria are met on an ongoing basis, including the requirement that at least 70% of the gross value of assets within the portfolio are invested in line with the sustainability objective and provided other general and specific labelling criteria are met on an ongoing basis -  assets for these purposes would include investments in other funds and directly in securities.  In response to feedback, the FCA has helpfully moved away from its initial proposal of separate accounts only being capable of using a label where 90% of the portfolio had the same label or would be label eligible. 
  • It is worth noting that where a label is used, the portfolio manager is required to meet the same standards whether the offering is to retail or professional clients – this includes the responsibility for ensuring that the labelling criteria are met on an ongoing basis notwithstanding that a client may have a prominent role in investment decisions.  Portfolio managers will therefore need to give thought to any compliance challenges that may arise in the use of labels for professional clients, particularly when offering bespoke portfolio management services.
• Naming and Marketing rules: these rules will apply only to those portfolio management offerings that are marketed to retail investors. Broadly, sustainability-related terms can be used in names and marketing if: 
  • 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 
  • it does not use a label but complies with the naming and marketing rules.  These include an obligation:
    • to produce the same types of disclosures as required for labelled products;
    • to clarify in a statement (either published on a relevant digital medium, or provided to the retail investor) that the offering does not have a label and the reason why.
    • to ensure that financial promotions relating to an offering are consistent with its label and associated disclosures, where relevant; and 
    • where sustainability-related terms are used in financial promotions relating to an unlabelled portfolio management offering, to produce the same types of disclosures and statement as those required under the naming rules.

Where a portfolio does not use label but in invests in some funds that have labels, the portfolio manager can explain in its marketing that some of the funds within the portfolio are labelled. However, the marketing and anti-greenwashing rules must be met, and the portfolio manager must not imply that the whole portfolio is ‘sustainable’.

• Consumer facing and product level disclosure requirements:  For both labelled portfolio management offerings and those that use sustainability-related terms in their names and marketing, portfolio managers will be required to produce:
  • consumer-facing disclosures summarising the key sustainability characteristics.  As with the approach for UK funds no specific disclosure template is provided, but the FCA have set out the categories of disclosures that firms would be required to make; and
  • detailed pre-contractual and ongoing annual product-level disclosures (with the obligation for pre-contractual disclosures for products using terms without a label kicking in on 2 December 2024).

As the FCA are proposing that portfolio managers provide information to their clients if not publishing the information, it is not proposing to include them in the on-demand regime, whereby clients can request the information if needed to meet their legal obligations.

• Entity level disclosure requirements: Consistent with the TCFD’s (and ISSB’s) 4 pillars, all firms with over £5 billion in AUM are required to annually disclose: 
  • their governance around sustainability-related risks and opportunities 
  • the actual and potential impacts of sustainability-related risks and opportunities on their businesses, strategy and financial planning 
  • how the firm identifies, assesses and manages sustainability-related risks; and
  • the metrics and targets used to assess and manage relevant sustainability-related risks 

Where firms use labels or sustainability-related terms in the names and marketing of their portfolio management offerings, they must also include details on their resources, governance and organisational arrangements for them. There will be scope for firms to cross refer to group/parent level disclosures or other relevant report, provided the information is clearly signposted and other cross-referencing requirements are met.

• Rules for distributors: The FCA’s proposal is to keep the requirements for distributors the same as under the final rules for UK funds with regards to communicating the labels and consumer facing disclosures, with distributors (e.g., financial advisers, platforms, etc) required (i) to communicate the labels used for portfolio management offerings and (ii) to provide access to the associated consumer-facing disclosures to retail investors, either on a relevant digital medium for the product or using the channel they would ordinarily use to communicate information. Distributors will be required to keep the labels and consumer-facing disclosures up to date with any changes that the portfolio management firm makes to a label or the disclosures.

Timing

The consultation closes on 14 June 2024, with the FCA intending to publish final rules in the second half of 2024.

This will not give portfolio managers long to prepare for the new rules, as the proposal currently states the FCA’s intention for the labelling, naming and marketing requirements and associated consumer facing disclosures and pre-contractual disclosures to come into force on 2 December 2024. This is the same timing as for fund managers (albeit that firms can begin to positively use the labels for their funds on 31 July 2024 so earlier than for portfolio management services). 

Consistent with the measures in place for fund managers:

• Firms will need to begin 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. 

Resources

You can find the FCA’s consultation paper (CP 24/8) here.

You can find our November 2023 client note on the FCA’s policy statement (PS 23/16) on the rules for UK funds here