SDR – The Devil’s in the Timeline

The recent Financial Conduct Authority (FCA) consultation on implementing the Sustainability Disclosure Requirement (SDR) rules for Portfolio Management has shown that the devil is not only in the detail, but also in the timeline.

Whilst supportive of the intended purpose and spirit of the regulator’s proposals, PIMFA’s response highlights significant concerns regarding some of the details and practicalities of the proposals put forward, which do not seem to take into account the unique requirements of the portfolio management market and, more generally, of retail investors.

Particularly, our members argue that the implementation timeline, as currently proposed, puts too heavy a regulatory burden on firms to complete the structural work necessary to meet the deadline, given that finalised rules will only be published around six weeks before the implementation deadline, and feel strongly that a 12-month delay is necessary.

Transition to compliance will be far from seamless and will take time to properly plan and implement, particularly in the new Consumer Duty age. We don’t believe that it is reasonable to expect firms to comply with such significant regulatory change in such a short period of time. Even medium- size firms in our sector do not have the capacity or resources to put the necessary infrastructure in place to meet this proposed timeline.

Further, before extending the SDR regime to portfolio managements, it would be helpful to see first how the rules work with funds. As the existing rules regulate funds that portfolio managers use in their solutions, it would surely be wiser to allow time for portfolio managers to align their propositions with how fund managers are re-positioning their own funds. There is a direct connection between how fund managers will apply the new rules, including whether labels will apply, and, in turn, how this will impact portfolio managers in deciding how to align their offerings with the proposed new rules.

Also, until there is more clarity around the inclusion of overseas funds, which are currently out of scope of the SDR regime, and the role of portfolio managers, it would be prudent to provide leniency and flexibility where solutions have offshore/non-UK funds. Otherwise, portfolio managers are being set a difficult, if not impossible, task in assessing and classifying these funds according to SDR rules when these funds are not designed or modified for this purpose.

The proposed rules represent a significant regulatory change with various complexities and dependencies involved. The short timeframe does not allow enough time for firms to plan and communicate changes for clients properly. Delaying the timeline for portfolio managers by 12 months after the publication of final rules will enable firms to ensure they can build a detailed and robust body of evidence to back up any label they decide to use and ensure the consumer-facing and pre-contractual disclosures are clear, high quality and valuable for their investors.

Firms have recently completed demanding work on TCFD reporting, and this has required significant time and resources from across their business. At a time when the industry is making moves to improve outcomes relating to consumer understanding, it would be a disservice to the sector to rush with the extension of SDR to portfolio management.

It is unlikely that the available investment universe of labelled products from which to construct portfolios will be sufficient by December 2024, and this adds weight to our members’ argument that the FCA should first allow for the implementation of SDR rules for funds before extending the regime to portfolio management.

 

First published in FT Adviser