Castlefield respond to FCA consultation on extending SDR scheme to portfolio management
We recently submitted a short response to the FCA’s consultation on extending the Sustainable Disclosure Requirements (SDR) regime to portfolio managers. We are supportive of this proposal but, as we indicate below, suggest that the implementation timeframe could be extended to allow portfolio managers the same amount of time to implement the scheme as fund managers have had. In the interests of transparency, we publish our full response below.
Castlefield Investment Partners LLP: Response to CP24/8 Extending the Sustainability Disclosure Requirements (SDR) regime to Portfolio Management
Q1: Do you agree with the proposed scope of our regime? If not, what alternative scope would you prefer and why?
Broadly speaking, we are in agreement with the proposed scope of the regime. However, we do have some concerns regarding the complexities involved with applying the regime to discretionary portfolio services, given that such services are tailored to individual client preferences including their views on sustainability, investment objectives, and the level of risk they are comfortable with. Further, the proposals do not take into account some of the practicalities of portfolio management, for example clients may opt for a labelled portfolio but also have legacy assets that do not fit with the sustainability criteria and which they may be reluctant to sell (e.g. for tax reasons).
Q2: Do you agree with the proposed implementation timeline? If not, what alternative timeline would you prefer and why?
We agree that the existing implementation date should remain so that portfolio managers who are prepared to use the labels and comply with the necessary obligations can do so. However, an extension to the end date should be considered so that portfolio managers are given the same implementation timeframe as asset managers have had. Our observation is that asset managers are more likely to be well-versed in the detail of sustainability themes and attendant KPIs but this will likely be a new area for most portfolio managers and IFAs. As such, it would be appropriate for portfolio managers to have available a timeframe spanning from the publication of final rules through to their implementation of not less than that available to collective scheme managers to adopt the new labels. It’s also worth noting that extending the end of the implementation period would allow DFMs to understand in full which funds they might select in building their own client portfolios are labelled, and which are not.
Q3: Do you agree with our approach to labelling portfolios, including the threshold and assessment requirements? If not, what alternatives do you suggest and why?
Yes, we agree with the new proposed threshold requiring 70% of the gross value of the portfolio to be invested in accordance with the sustainability objective. This is more feasible than the originally proposed threshold of 90% and provides consistency with the criteria for funds, which we believe is appropriate.
It’s worth pointing out that collating KPIs on a look-through basis would be cumbersome for portfolio managers as third-party managers will all have their own, differing, approaches to developing KPIs. We recognise that the consultation document appears to offer a pragmatic solution to this by suggesting that portfolio managers treat each fund as an ‘asset’. However, we would welcome some examples from the FCA on what they would consider to be suitable fund level KPIs. In addition, when treating a labelled fund as an asset, we would welcome clarification from the FCA on whether to treat 100% of the fund as sustainable, or just the percentage that is aligned with the underlying fund’s sustainability objective.
Q4: Do you agree with our approach to naming and marketing? If not, what alternative approach would you suggest and why?
Yes, we are in agreement with the proposals regarding the use of sustainability-related terms in products’ names and marketing in the event that Portfolio Managers want to make available “thematic model portfolio services” aligned with a specific label. Our observation of the approaches discussed thus far for “fund of funds” Collective Scheme managers is that the “mixed” label would be used in the vast majority of cases. As these products have the closest alignment with a multi asset portfolio service, the uptake of labels for Portfolio services other than the “Mixed” label may be modest and which calls into question the need for specific sub-categories of label. We agree that other aspects of compliance with the marketing rules should be applied in a common way as for labelled products.
Q5. Do you agree with our proposed approach to disclosures, including the tiered structure? If not, what alternative do you suggest and why?
Yes, we agree with the proposed approach to consumer-facing disclosure, detailed product level disclosures and entity-level disclosures. In terms of the consumer-facing disclosures, it is appropriate that the categories of disclosures to be included are consistent with the approach for UK funds.
Q6: Do you agree with our proposals for distributors? If not, what alternatives do you suggest and why?
We agree with the proposal to keep the requirements for distributors the same as under the final rules for UK funds regarding the communication of labels and consumer-facing disclosures. In addition, we agree that it is appropriate to do so using a digital medium or channel that is ordinarily used to communicate information.
Written by Eleanor Walley & Ita McMahon