SDR And Investment Labels: Extension Of The Regime To UK Portfolio Managers

Key points

• In November 2023, the UK Financial Conduct Authority (FCA) published its first set of rules on Sustainability Disclosure Requirements (SDR) and investment labels. These covered UK "asset managers" (UK AIFMs and UK UCITS managers) in relation to UK funds, as well as distributors of UK UCITS and alternative investment funds.
• In April 2024, the FCA published a consultation paper on extending the SDR and investment labels regime to "portfolio managers".
• The term "portfolio managers" will have the same extended meaning as applies in the current TCFD-aligned rules in the FCA's ESG sourcebook. This will cover segregated portfolio management and private equity or other private market non-discretionary advice on investments, in each case subject to exemptions.
• Firms providing portfolio management services from the UK to UK-based clients will be in scope. Out of scope, however, will be: services provided to non-UK clients and services provided to funds, AIFMs or management companies (wherever located). So segregated portfolio management services provided to an AIFM under a delegated management agreement will be out of scope, as will non-discretionary advisory services provided to an offshore AIFM. The extension of the regime should therefore be of limited relevance to many private capital structures.
• FCA portfolio managers, like all other FCA-authorised firms, will be subject to the anti-greenwashing rule as from 31 May 2024 – this was settled in November 2023 and is independent of the timing and outcome of the April 2024 consultation.
• The labelling regime and naming and marketing rules (and the associated disclosures) will come into force on 2 December 2024.
• Otherwise, in terms of timing, all the other aspects of the regime as extended will start applying on the same implementation dates that have been set for UK asset managers with UK funds.
• The naming and marketing rules will only apply to portfolio management services provided to retail investors.
• As regards the product-level reporting, portfolio managers must either publish on the relevant digital medium (e.g. on a specific webpage, or page on a mobile app or other digital medium at which the sustainability product is offered) or must provide it direct to the client. This option of providing "private" disclosure to the client means that the "on demand" regime will not be applicable to portfolio managers.
• The distributor rules will be extended to capture distributors of portfolio management offerings (e.g. financial advisers, platforms). This extension will take effect on 2 December 2024.

1 Introduction

On 23 April 2024, the FCA published CP24/8: Extending the SDR regime to Portfolio Management. The consultation will close on 14 June 2024.

In November 2023, the FCA had published a policy statement setting out its rules for the new Sustainability Disclosure Requirements (SDR) regime, including a set of consumer-friendly investment labels. Our briefing is here. With the exception of the "anti-greenwashing rule", which will apply to all FCA-authorised firms from 31 May 2024, the finalised rules confirmed the introduction of the regime, on phased implementation dates, to apply initially only to UK asset management firms (UCITS managers and AIFMs) that manage UK-domiciled funds. At the time, portfolio management was excluded (as were overseas funds).

The FCA is now consulting on extending that regime to portfolio management of sustainability products.

By and large, the FCA has sought to align the requirements applicable to portfolio managers with those that are going to apply to asset managers. This "level playing field" means that portfolio managers will, for the most part, and subject to the detailed application provisions, be subject to the same rules in substance as those that apply to asset managers – many of the rules will come into force on 2 December 2024, perhaps rather sooner than originally mooted. This may suit some portfolio managers (and, indeed, the FCA suggests that some portfolio managers had asked for this) but for others who may have relied on having more time to prepare, this puts the pressure on.

The regime, as extended, is broken down into a series of modules (set out below), some of which interact with one another. The implementation of these will be phased, as indicated. As we previously mentioned, many of the requirements build on the existing TCFD-aligned disclosure requirements under the ESG sourcebook.

2 The definition of "portfolio management"

As with the existing TCFD-aligned rules in the ESG sourcebook, the term "portfolio management" will have an extended meaning for the purposes of the SDR and labelling rules. The first "limb" is as one would expect: it covers managing investments (i.e. the regulated activity, under article 37 of the Regulated Activities Order, of managing assets belonging to another person in circumstances involving the exercise of discretion). The second "limb" extends to private equity or other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement the predominant purpose of which is investment in unlisted securities.

So while the first limb captures segregated portfolio managers and – the FCA's particular focus – wealth managers, under the second limb adviser/arrangers will also be caught, at least on the face of it.

3 The definition of "sustainability product"

In the context of portfolio management there will be a specific meaning of "sustainability product": an agreement or arrangement under which a firm provides portfolio management unless the client is, broadly put, outside the United Kingdom or is a fund, or an AIFM or management company for or on behalf of a fund. The proposed rules apply only to portfolio management in relation to sustainability products.

It follows from the above that arrangements under which a UK portfolio manager (in the extended sense) provides services to clients outside the UK will be out of scope. Further, services that a segregated portfolio manager provides to an AIFM or management company for and on behalf of a fund (wherever the fund manager and/or fund are based) will also be out of scope.

So, who will be caught?

In-scope:

• Managers providing segregated portfolio management services to UK clients normally resident in the UK or with their registered office (or head office) in the UK (except where the client is a UK fund, or UK AIFM or UK management company on behalf such fund) – e.g. pension funds, insurance companies, individual wealth management clients.
• Private equity adviser/arrangers providing their advisory services on a recurring or ongoing basis in connection with an arrangement the predominant purpose of which is investment in unlisted securities on a sub-advisory basis to other UK-regulated investment managers.

Out of scope:

• Managers providing segregated portfolio management services to clients that are based overseas (i.e. individuals who normally reside outside the UK or entities that have their registered office (or head office) outside the UK).
• Managers providing segregated portfolio management services to a client (wherever based) that is a fund, or an AIFM or management company on behalf of a fund – i.e. where the portfolio manager acts as delegated discretionary investment manager.
• Adviser/arrangers providing their private equity/private market advisory services to their clients (wherever based) that are funds, or AIFMs or management companies on behalf of such funds.

On the face of it, despite the extended scope of the definition of "portfolio management", adviser/arranger firms should not be caught by the extension of the SDR and labelling regime unless and to the extent that they are providing advisory services to a UK-based investment managers – e.g. on a sub-advisory basis. The more usual fact pattern of providing advisory services to their affiliated, offshore AIFM is excluded.

There is an argument that all portfolio management services are outside the scope of ESG 4 on the basis of the drafting of the draft rules in the consultation paper. That would mean such firms are not subject to the labelling, naming and marketing rules, and would also exclude them from the anti-greenwashing rules. That reading conflicts with the narrative in the consultation and we expect that this point will be clarified in the final rules.

4 Overview: Scope and requirements

The summary sections below follow the same format as our previous briefing and are specifically designed to assist portfolio managers in conducting an initial scoping exercise to determine which aspects of the regime will apply to them and their potential impact. Therefore, all of the sections below address the application of the extended rules with specific reference to portfolio managers only. If you would like a version of the summary sections that addresses scope and requirements on a cumulative basis – i.e. to cover UK AIFMs, UK UCITS managers, UK AIFs, UK UCITS together with UK portfolio managers – please speak to your usual contact or one of the individuals below.

Anti-greenwashing rule

This rule was settled in the November 2023 policy statement and comes into force on 31 May 2024. It is therefore not covered as part of the consultation but, for the sake of completeness – since it will apply to portfolio managers among other FCA-authorised firms – it is included here by way of reminder.

It is a blanket rule applicable to all FCA-authorised firms (technically under the heading "Naming and marketing rules" but, in reality, it stands alone and has a different scope and application to the naming and marketing rules (see below)). It is supported by finalised guidance – see our briefing on this.

Naming and marketing rules

Retail-specific rules picking up a theme already seen in the EU – ensuring that sustainability terms in product names and marketing documents are backed by some substance and are not mere greenwashing. The naming and marketing rules will not apply to portfolio managers providing professional-only services.

Voluntary labels

The FCA's overall aim is to achieve a high degree of consistency with the regime settled for fund managers: the use of labels (subject to meeting qualifying criteria and specific disclosure requirements) is voluntary. Although the FCA says that the extension of the regime is primarily aimed at wealth management services for individuals and model portfolios for retail investors, portfolio managers with professional clients may choose to use them (although the FCA specifically asks whether there is appetite for portfolio managers to do so in such circumstances).

Product-level disclosures

Requirements on UK portfolio managers in respect of both their labelled offerings and those which are unlabelled but which use ESG terms in their names or marketing documents, to expand their TCFD product-level reports (which only concern climate-related financial risks) to disclose information on the sustainability characteristics of the product.

For further detail, see section 5 below.

For further detail, see section 6 below

5 Product-level disclosures

There are three types of product-level disclosures that may be relevant to portfolio managers, subject to the detailed scope and application provisions of the regime noted above.

A. Consumer-facing disclosures

These aim of these disclosures is to provide key, standardised sustainability information for consumers to make investment decisions. They are only required in the case of the portfolio manager's retail clients. They will be required from 2 December 2024 in relation to a portfolio manager's labelled products and its non-labelled products which use ESG terms in their naming and marketing. They should be provided alongside other key investor information and (like the requirements for asset managers) must be contained in a standalone document no longer than 2 pages and, where relevant, no more than "one mouse click away" from where the label is presented. The information should include (among other things):

• Either the sustainability objective (clearly identified as the "sustainability goal" for the product) and the product label, or a statement making it clear that the portfolio management offering does not have a label.
• The portfolio manager's investment policy and strategy (clearly identified as the firm's "sustainability approach") including details of what the relevant portfolio will and will not invest in.
• A summary of the relevant KPIs and/or metrics (clearly identified as the firm's "sustainability metrics") calculated using the most up-to-date data available at the time.
• Details (including, where appropriate, hyperlinks) as to where the retail client can easily access other relevant sustainability and non-sustainability-related information.
• For the "Sustainability Mixed Goals" label only (if relevant), the proportion of the portfolio management product's assets which are invested in line with each of the other relevant labels (see above as to what constitutes "assets" in this context).

As with all product-level reporting, portfolio managers must make their consumer-facing disclosures available either by publishing them in a prominent place on the relevant digital medium at/through which the product is offered (e.g. on a specific webpage, or page on a mobile app or other digital medium at which the sustainability product is offered) or, if not publishing information (i.e. because they do not make their portfolio management offerings publicly available), must provide it direct to the client. It is likely that most in-scope portfolio managers will elect to use the latter approach.

The FCA has deliberately not produced a template but continues to encourage the industry to produce one.

When previously consulting, the FCA had proposed that portfolio managers would not be required to produce their own consumer-facing disclosures and would instead have to provide an index of the underlying funds in which their portfolios are invested including the label and a hyperlink to the consumer-facing disclosure in respect of the relevant fund. However, since the FCA's latest consultation proposals require portfolio managers specifically to assess their portfolios against the relevant criteria themselves, they will now be required to produce their own consumer-facing disclosures for retail investors.

Portfolio management firms should consider how their consumer-facing (and other) disclosures are compliant with the Consumer Duty, particularly the consumer understanding outcome. This is likely to require firms to test, monitor and, if necessary, adapt their consumer facing disclosures.

B. Pre-contractual sustainability disclosures

These disclosures aim to provide more detailed sustainability information than that contained in the consumer-facing disclosures. These are intended for retail investors who want more information, or (if relevant) for institutional investors.

As regards all product-level reporting including pre-contractual disclosures in-scope portfolio managers must either publish in a prominent place on the relevant digital medium at/through which the product is offered (e.g. on a specific webpage, or page on a mobile app or other digital medium at which the sustainability product is offered) or, if not publishing information (i.e. because they do not make their portfolio management offerings publicly available), must provide it direct to the client. Because portfolio managers are either required to publish their disclosures or to provide it "privately" direct to clients, they have not been made subject to the "on demand" regime that is available to certain fund managers (unauthorised AIFs managed by full-scope UK AIFMs or small authorised UK AIFMs, which are not listed on a recognised investment exchange).

For offerings using a label, the information to be disclosed is broadly associated with the qualifying criteria for using the relevant label; for offerings not using a label, the disclosures must include as a minimum information relating to the investment policy and strategy, together with relevant metrics.

C. Ongoing public product-level sustainability disclosures

In-scope portfolio managers making sustainability-related pre-contractual disclosures (see above) must also prepare, on an annual basis, "Part B" of a "public product-level sustainability report". The first such report will become due from 2 December 2025 (whether the product is labelled or non-labelled products but with ESG terms used in naming or marketing). The report is intended to provide details of the sustainability performance of the product.

As regards all product-level reporting including ongoing product-level disclosures in-scope portfolio managers must either publish in a prominent place on the relevant digital medium at/through which the product is offered (e.g. on a specific webpage, or page on a mobile app or other digital medium at which the sustainability product is offered) or, if not publishing information (i.e. because they do not make their portfolio management offerings publicly available), must provide it direct to the client. In the latter case, although the content of the disclosure must be in keeping with the requirements applicable in the case of a public product-level sustainability report, the information will not be made public.

6 Entity-level disclosures – 'sustainability entity report'

This report focuses on sustainability-related risks and opportunities. It builds on existing TCFD-derived requirements and follows the same 4-pillar approach adopted by the TCFD and ISSB on governance, strategy, risk management, and metrics and targets. Additional requirements apply where a firm has a product in respect of which product-level disclosures are being made.

The rules expressly refer to the fact that a number of global standards may be relevant in helping firms to determine what they should disclose: the TCFD's supplementary guidance for asset managers, the IFRS sustainability disclosure standard (i.e. IFRS S1), the SASB Standards and the GRI Standards (although firms are discouraged from attempting "line by line" disclosures).

The rules – which are the same as those for asset managers – will apply to all portfolio management firms with over £5 billion assets under management. The first annual report for portfolio managers with over £50 billion AUM will be required by 2 December 2025. Other in-scope portfolio managers will have until 2 December 2026 to produce their first sustainability entity report.

7 Next steps

Portfolio management firms should assess the scope of the regime carefully. They will, of course, be subject to the new anti-greenwashing rule which will come into force on 31 May 2024. Beyond that, however, the scope of the extension of the SDR and labelling regime to portfolio management firms is limited, as set out above.

Firms should review and update their investor communications as appropriate. Firms should also monitor for the upcoming HM Treasury consultation on extending the regime to cover overseas recognised schemes.

UK firms with portfolio management offerings to retail clients will likely have more to do, particularly if those products have sustainability related terms in their names. The deadline for making such products compliant with the applicable minimum requirements is 2 December 2024.

Appendix – General and specific qualifying criteria for labels

All of the general qualifying criteria summarised at (A) below and the label-specific criteria summarised in (B) below must be met on an ongoing basis in order to be able to use a label, subject to some leniency in respect of escalation or remedial plans (as further described below). The term 'portfolio' is used below to denote the 'sustainability product' in this context – i.e. an agreement or arrangement under which a firm provides portfolio management (subject to the carve-outs from the definition of sustainability product).

There are numerous other requirements relating to the use of labels including FCA and investor notification requirements which are not covered in this briefing.

A. General qualifying criteria

B. Specific qualifying criteria

In addition to the general and overarching criteria at (A) above, the use of each label is subject to a set of specific qualifying criteria. It is beyond the scope of this briefing to examine each of them in detail, but the table below summarises the key, defining features of the labels.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.