The investment industry has reacted with disappointment after the Financial Conduct Authority (FCA) indefinitely postponed plans to extend its Sustainability Disclosure Requirements (SDR) regime to model portfolio services (MPS).
In February 2025, the FCA announced it would no longer publish a policy statement in Q2 2025 that would put MPS under the scope of SDR, saying it was aware that it was taking longer than expected for some asset managers to comply with SDR and the labelling regime, and of the potential impact this might have on portfolio managers.
Also read: How has SDR affected UK investment portfolios so far?
However, despite “broad support” for the move, and after spending more time considering feedback and taking into account “wider regulatory work affecting portfolio managers”, the FCA has said now is not the right time to finalise rules on extending SDR to portfolio management.
“We intend to prioritise the forthcoming multi-firm review into model portfolio services (as announced in the Asset Management & Alternatives portfolio letter),” the FCA stated.
“The review will focus more broadly on how firms are applying the Consumer Duty to provide confidence that investors are receiving good outcomes from model portfolio services.
“We remind firms of their obligation to comply with the anti-greenwashing rule, which came into effect on 31 May 2024.”
Industry reaction
Neill Blanks, managing director at MainStreet Partners, commented: “The latest FCA SDR update would suggest that they are not ruling out scrapping it for MPS providers in the future, but for now they have other priorities. From our perspective this is very disappointing, but it’s not the first time that we have seen the can being kicked down the road as it were. We have been in conversations with MPS providers over the last six months who are keen to be at the forefront of Sustainability investing within the space and were looking forward to having more clarity from the FCA in terms of the specific requirements in order to qualify to use a similar SDR-type label for MPS.
“We look forward to continuing the dialogue as there is obviously client demand and would expect the subject to come back on the FCA’s agenda in due course.”
Gemma Woodward, head of responsible investment at Quilter Cheviot and member of the PA Future Committee, said extending SDR to wealth management was “always going to be difficult given the often-unique relationship between a client and their intermediary”.
“The FCA rightly set a high bar with SDR, but as a result we have seen the adoption of its labels take far longer than most would have expected. After initial confusion about what could and could not qualify, the fund industry is now responding but there is a lengthy backlog. Applying SDR to portfolio management at this stage, therefore, was clearly not an option.
“While it appears this move has been kicked down the road, it isn’t clear whether it has been cancelled altogether. The FCA will be watching how SDR embeds within the asset management industry closely and what will need to be done to extend the regime. Wealth managers and financial advisers too should take note. Furthermore, the FCA has made it clear that the Consumer Duty will still play a role in ensuring customer understanding of what they are investing in, while the anti-greenwashing rule applies across the board so consideration still has to be made.
“What is needed now is clear communication from the FCA and wide engagement from the industry to ensure that any future change that can be implemented is done so with plenty of time and comprehensive understanding of what is expected.”
Jake Moeller, associate director – responsible investment at Square Mile Investment Consulting and Research and also a member of the PA Future Committee, said the regulator is to be “commended” for the move.
“We have been supportive of the SDR to eliminate the misrepresentation of sustainability credentials in the fund management industry, but we welcome the postponement of its application to portfolio management services.
“The FCA has recognised the concerns that have previously been raised including the 70% threshold for labelling, the appropriate criteria for PMS and the use of currently out-of-scope building blocks, to name a few. There are considerable touch points and moving parts for PMS providers, not just with respect to construction but also distribution. The anti-greenwashing rules are already in effect to all authorised firms so the FCA’s willingness to listen and potentially engage further on achieving a workable PMS application within SDR is to be commended.”
Andrius Makin, senior portfolio manager within the fund research team at Killik & Co, said the universe of funds is currently too small to provide MPS investors with sufficiently diversified portfolios, and adds he had concerns about concentration risk.
He continues: “I think the major headache for managed portfolio services looking to adopt a label was determining a ‘sustainability objective’. Essentially, this is a benchmark that measures the sustainability of assets and their contribution to that objective. MPS products were expected to have their own sustainability objective, even if only investing in labelled funds. Combining this data and presenting it to investors in a coherent way is very difficult.
“My key question is, where do we go from here? Sustainable MPS products will continue to fall under the FCA’s anti-greenwashing rules, which requires managers to back up any sustainability claims they make. Investors, however, may be left in limbo for some time. The labels were expected to provide managed portfolio services with best practices in terms of disclosures and marketing but that is now on hold indefinitely. I think the regulator will come back to this project in the future, in the meantime managers will need to focus on staying within the anti-greenwashing framework.
“Ultimately, sustainable MPS products have been growing in popularity, and I don’t think the absence of labels will stop this. However, SDR has improved the transparency of sustainable funds and we may see investors expect the same from their managed portfolio services.”
Key feedback
The FCA highlighted key feedback it received from its consultation on the subject.
Initially, the regime was expected to come into force for portfolio managers by 2 December 2024, but respondents called for more time to make the necessary changes, for the regime for UK funds to bed in and for greater clarity on the extension of SDR to funds in the Overseas Funds Regime.
A tiered approach to disclosure, including consumer-facing, product-level and entity-level reports, was broadly supported, with some respondents calling for clarity on practical considerations and how they interact with other sustainability reporting requirements.
Likewise, a proposal that portfolio management offerings to retail investors are subject to the naming and marketing rules, for example, was received positively, but there were calls for clarity on how they apply to different types of portfolios and client relationships.
This was in line with feedback received on scope, with respondents questioning how it would be applied to bespoke portfolios, and how the rules should apply to agent-as-client models where the adviser acts as a professional client of the portfolio manager.
The FCA also initially proposed that a portfolio could use a label where portfolio managers determine that it meets certain qualifying criteria. Respondents questioned how this would work in practice, given the different roles and responsibilities that a portfolio manager has, the resources available, and the types of products and services offered compared to asset managers.