Like much of the industry, TWC’s start to 2023 has been dominated by Consumer Duty-related projects. Amongst all of that noise, however, we haven’t forgotten that there are other regulatory initiatives underway. The FCA’s latest consultation on the UK version of the Sustainable Disclosure Regime (sustainable labels for financial products) closed towards the end of January – and it has been interesting to see some common themes emerging in feedback.
We should perhaps declare at this point that we conducted research with customers and advisers on some of the earlier labelling proposals on behalf of the Investment Association, so it is perhaps unsurprising that there is a degree of overlap in our views. We wanted to comment very specifically on the aspects of CP22/20 that would affect consumers.
It is hard to argue with the idea of consumer signposts
We are very supportive of the principle of having a labelling system – and a three-label categorisation system provides the simplicity that most customers crave (even though we know that there is a complex landscape out there).
"There has to be clear guidance when you are signing up to a fund about where your money is going."
We also have sympathy with the aims of the FCA in setting a high bar to create a sustainable investing product set that customers can trust. And though it may seem hard on those firms that have a distinct and well-established ESG process, it feels sensible to us to view ESG through a risk management lens. When we explain ESG to customers, it seems to them a no-brainer that firms would be taking these factors into account when selecting investments.
We do, however, have some concerns about the likely impact of the labels and marketing rules as they were set out in CP22/20, partly drawn from our work with customers, and partly our interaction with asset and wealth management firms.
Could the proposals limit customer access to products?
Most customers we spoke to were pragmatic about what sustainability really means… we think the proposals could limit customer access to products that are a good match for current expectations on sustainability.
- The labelling system ideally needs to help customers navigate the existing fund landscape, or it could undermine customer trust in the concept. For example, if sustainable strategies (by current standards) do not qualify for a label or have to be re-named/re-positioned. The ‘sustainable’ cat is already out of the bag – yes there needs to be consistency and rigour in how the term is applied, but the industry isn’t starting with a blank canvas.
- The current proposals around multi-asset funds and portfolios could reduce the availability of solutions that perform an important role in customers’ long-term savings and (as things stand) meet their current expectations on sustainability. We don’t deny the need to tighten up on standards and language. However, it seems to us that changes that substantially curtail customer choice, even in the short to medium term, don’t support the longer-term goal of encouraging the transition to sustainable finance.
- Having separate regulatory documentation on sustainable criteria is likely to prove a barrier to some investors. Our feedback recommended finding a way that some element of ‘summary’ disclosure could be surfaced in all fund literature, but then make more detailed disclosure available for those customers who want it (not forgetting that future disclosure requirements could look very different anyway).
- We feel that the marketing rules set out in CP22/20 needed greater clarification and thought on the practical applications. Providing firms with a little more flexibility in terms of the use of language/location of disclosures for those funds that don’t qualify for a label wouldn’t, we feel, detract from the overall utility of a labelling system. It would also allow firms to explain their policies more clearly to customers across a wider range of products – a good thing, surely?
We know how important sustainability is to a lot of the customers we interview and look forward to seeing the final proposals from the FCA. And working as an industry to build customer awareness of and engagement with genuinely sustainable products.
