31 July 2024 is the second key date in the roll-out of the FCA’s Sustainability Disclosure Requirements (SDR) and investment labels, following the introduction of the Anti-Greenwashing Rule in May. However, many are confused if it is a deadline or just the starting point for new rules
The answer depends on whether you are looking at it from the viewpoint of a fund management group or a distributor.
The end of July is the earliest date at which a fund can adopt one of the four new sustainability labels – Sustainability Focus, Sustainability Improvers, Sustainability Impact or Sustainability Mixed Goals. This includes having a sustainability objective, adding a pre-contractual disclosure to the prospectus, and publishing a consumer-facing disclosure document. But there is no obligation on any fund to be up and running with a label on 31 July.
Deadline for distributors
As soon as the first funds adopt a label, distributors need to be able to identify those funds; post the label, the consumer-facing disclosure and a link to the FCA’s sustainability disclosure web page; and have an effective way of monitoring changes to labelled funds in real-time.
The FCA has made it clear that it does not approve or endorse a fund’s choice of label, but any amendments to funds required before a label can be adopted, such as the introduction of a sustainability objective, as well as applications by new funds, need to go through the FCA’s Authorisation team in the usual way.
The process of managers getting fund changes authorised by the FCA is taking longer than many anticipated. The timeframe for the additional actions necessary for these changes, including, in most cases, 60 days’ notice to investors, means that it may still be some time before the first funds can adopt a label. For distributors still working on getting their systems ready for the new obligations, this is welcome news.
Indeed, the FCA acknowledged in its SDR policy statement that respondents to its earlier consultation paper had asked for a longer lead time to implementation, as well as clarity on the FCA’s authorisation process, because of this timeframe. The FCA pushed back on those requests, citing “the need to address potential harm as early as possible”, but that need has not translated into the approval of the changes necessary for funds to adopt a label.
At the time of writing, I am not aware of any fund that is close to adopting a label, which means that those platforms and other distributors who had scheduled their system changes to be ready for the end of July are best positioned for when the first fund labels arrive.
Ongoing monitoring
As with every obligation for distributors to show information about funds, ensuring they receive the information they need when they need it, is key. Fund groups looking to promote their funds as sustainable will no doubt make every effort to get both that fact and the necessary disclosure documents to all outlets as soon as possible, but distributors will also need to be aware of changes to any funds further down the line.
Changes will most likely occur after a regular review of the consumer-facing disclosures, but they could extend as far as a change of label, or even dropping a label altogether. The label and disclosures must be updated in between regular reviews if the fund group is aware that anything material has changed. This needs to be communicated to distributors, so they can link the right label and make available the latest correct consumer-facing disclosure.
The problem for distributors identifying which funds must publish a consumer-facing disclosure will increase significantly on 2 December. However, it could become slightly easier, as anything that sounds like a sustainable fund, with a sustainability-related term in its name or if it is marketed as such, must then produce the disclosure, even if it doesn’t reach the requirements for a label.
In preparation for this, the European MiFID Template (EMT) – the industry template used to provide fund data to distributors – now has a field to identify if the fund produces a client-facing disclosure in the UK. Expect that field to change a lot in the early stages, but once a fund produces the disclosure, it is unlikely to change that soon.
It will be challenging between now and the end of the year, both for groups managing sustainable funds – with or without a label – and for distributors who need to keep their clients informed.
