Portfolio managers will be covered by the Sustainability Disclosure Requirements

The Financial Conduct Authority (FCA) published its Consultation Paper on 23 April that sets out its updated proposals to extend the Sustainability Disclosure Requirements (SDR) and investment labels regime to portfolio management.

The FCA proposals are primarily aimed at wealth management services for individuals and model portfolios for retail investors and are likely to be introduced relatively swiftly.

Who is in scope?

The proposal is to extend the SDR to firms providing portfolio management services in a broad sense, including services provided to clients that involve managing investments or "private equity, or other private market activities". The latter services consist of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement whose predominant purpose is investment in unlisted securities. The services are only in scope when they have been carried out from an establishment maintained by the portfolio manager in the UK.

The regime has been developed principally for retail investors.  However, firms offering portfolio management services to professional clients or institutional investors can opt into the labelling regime. If so, they must either publish or provide the associated detailed disclosures to investors.

However, it is not proposed that portfolio managers offering services to professional clients be subject to the specific naming and marketing requirements, although the FCA's incoming anti-greenwashing rule will still apply to FCA authorised firms.

Who is not in scope?

The proposed scope of the proposals does not include services provided to funds, alternative investment fund managers (AIFMs) or management companies, such as where an AIFM has delegated portfolio management to a firm. Nor does it include services provided for overseas clients.

Extended SDR: elements and proposals

Implementation timeline

The labelling and naming and marketing requirements will likely come into force on 2 December 2024, along with requirements for consumer-facing and pre-contractual disclosures. This is the same date as the naming and marketing requirements coming into effect for fund managers. The FCA noted in its proposals that this timeframe is based on industry feedback, with those consulted expressing a preference for being on the same timeframe as fund managers.  

Firms will need to start producing ongoing product-level disclosures on a phased basis from one year later. Firms will also need to start producing entity-level disclosures, the deadline for which will be dependent on their size:
•    Firms with in-scope AUM £50bn or more will need to produce entity-level disclosures by 2 December 2025.

•    Firms with in-scope AUM £5bn to £50bn will need to produce entity-level disclosures by 2 December 2026.

The FCA's consultation will close on 14 June 2024, and the regulator aims to publish any updates to the draft rules in the second half of 2024.

Osborne Clarke comment

Portfolio managers had requested similar implementation timeframes as those that applied to fund managers, but the consultation does not provide a great deal of time for firms to prepare. Especially as the final rules are planned to be published in the second half of 2024, but come into force from 2 December 2024. Firms have little option than to consider how these proposals will impact them now, and start preparing on the basis that the final rules will not deviate substantially from the consultation.

It will be interesting to see whether sustainable portfolio managers with professional clients will consider using labels and whether the additional investment adjustments and compliance burdens would be justified in order to appeal for instance pension funds, many of which are subject to increasing pressure to be investing their own funds in a sustainable manner. 

This Insight was written with the assistance of Tundun Basorun, Trainee Solicitor at Osborne Clarke.