The Financial Conduct Authority (FCA) has decided to offer “limited temporary flexibility” for firms to comply with the Sustainable Disclosure Requirements’ (SDR) ‘naming and marketing rules’ until 5pm on 2 April 2025, but only in in “exceptional circumstances”.
Previously, groups were expected to comply with the rules by 2 December, and either adopt one of the SDR fund labels – Sustainability Focus, Improvers, Impact or Mixed Goals. However, the FCA said it had received some queries about the authorisation of mergers, wind-ups or terminations before 2 December 2024, and as a result it is taking “a supportive, proportionate and outcomes-based approach in these circumstances”.
The regulator stressed the “exceptional circumstances” would only apply where a firm has submitted a completed application for approval of amended disclosures for that fund by 5pm on 1 October 2024, is currently using one or more of the terms ‘sustainable’, ‘sustainability’ or ‘impact’ (or variations thereof) in the fund name and is intending either to use a label or change the name of the fund.
The FCA emphasised “where firms can comply with the rules without requiring this flexibility, they should do so”. They also said they expected firms to comply with the rules as soon as they can, without waiting until 2 April.
These temporary measures do not apply to funds using other sustainability-related terms in their names that were not specified, and firms must continue to comply with all other relevant rules, including the anti-greenwashing rule.
See also: Over 1,200 UK funds facing ‘urgent compliance deadline’ for SDR naming and marketing rules
In the update, the FCA said in recent weeks, it “had been encouraged to see good progress made by firms to comply with the rules”, and a strong pipeline of fund applications from firms wishing to use the labels.
Nevertheless, through engagement with industry and their representative trade bodies, the regulatory body said it had become clear that it had taken longer than expected for some firms to make the required changes. In particular, some firms wishing to use an investment label, or which need to change the names of their products, “require more time to meet the higher standards and prepare the disclosures needed for our approval”.
“Given the importance of getting SDR right for investors, we are seeking to take a pragmatic and outcomes-based approach to provide further support to those firms which may need additional time to operationalise any changes required,” the statement asserted.
Granular reporting requests prove challenging
The FCA launched SDR and the investment labels regime in November 2023, designed to protect investors by helping them to make more informed decisions when investing.
Managers of UK-based investment funds have been able to use these investment labels on their products since 31 July 2024. However, although it was described as an “amazing starting point” with the potential to transform the sustainable investment space, enthusiasm started to wane as fund providers discovered just how granular the FCA had been in their requests for KPIs, objectives and data points.
See also: SDR: Those who take action now ‘will be best prepared for the next deadline’
Further, research from FE fundinfo recently revealed the scale of the challenge facing the investment industry to comply with the SDR labelling regime ahead of the 2 December naming and marketing deadline. Some 1,213 UK funds – covering ETFs, IA unit trusts, Open-Ended Investment Companies (OEICs) and investment trusts – will need to comply with these stringent requirements for SDR, given the sustainability-related terminology in their names.
WHEB Asset Management recently confirmed it will be adopting the ‘Sustainability Impact’ label on its FP WHEB Sustainability fund in the coming weeks, one of the first funds to use this label since SDR was rolled out on 31 July.
Reaction
Oscar Warwick Thompson, head of policy at UKSIF, said the FCA “had demonstrated pragmatism” in their decision, as many firms that are genuinely striving to comply with the ‘naming and marketing’ rules were still facing “imminent ‘cliff-edge’ risks” ahead of the 2 December timeframe.
“What this temporary period should not do is lead to greater complacency within industry and markedly slower progress towards compliance. We strongly encourage firms to keep up momentum in their implementation processes, ensuring high-standard disclosures for clients. The FCA too must ensure they continue to give industry their active support, including through more frequent, detailed updates to the SDR guidance webpage, more transparency on overall fund approvals and widespread sharing of good practices to foster a high standard across the sector.
“Ultimately, we hope this flexibility can serve as an opportunity for the industry, alongside the regulator, to further refine their approach to the SDR, rather than any reason to fundamentally delay progress in implementation.”
Helen Slater, regulatory manager at FE fundinfo, added: “The announcement is a welcome one and shows that the FCA has listened to the industry. Although some funds are now getting their approvals through, the industry, in general, has seen delays in getting funds authorised under the new rules and this has a knock on effect. The extension will allow for management companies to engage fully with the regulator in order to get comfortable with what the FCA requires to be compliant with the new rules.”
Bhavik Parekh, research associate at MainStreet Partners, noted some funds still need to comply: “By allowing this ‘temporary flexibility’, the FCA has given a little breathing room for funds to apply a label if they have ‘sustainability’ or ‘impact’ related terms in the name. This will allow further time for asset managers to complete the authorisation process (which is taking some longer than anticipated) and gives more time to prepare all the necessary documentation.
“However, it should be noted that for the vast majority of funds that are in scope of the naming and marketing rules, i.e. more general ESG funds, these will still have to comply by the 2 December.”
Meanwhile, Roger Lewis, head of sustainability and responsible investment at Downing LLP, warned this could set a “risky precedent”.
“The FCA didn’t allow any extensions for the anti-greenwashing rule. This went live on 31 May and all marketing collateral was reviewed so claims can be substantiated, they are clear and can be understood and they are complete.
“Or is this pragmatism? If there is a genuine reason why firms can’t comply with the naming and marketing rules within three months from now, then the extension helps them to avoid risks of being fined or not complying or greenwashing. But what counts as a genuine reason? For example, a firm has applied for a label and is waiting to hear back if approved and therefore eligible to be in scope of the naming and marketing rules? This might be ok for a process that’s completely new for both investors and the regulator, while it implements.”
