‘On the naughty step’: Implications of SDR and Consumer Duty for advisers

Square Mile webinar considers whether SDR means ethical funds and index trackers are left behind

UK advisers are grappling with two upcoming regulatory requirements this year – Consumer Duty and the Sustainability Disclosure requirements (SDR) – and asset managers are also struggling with how to help them amid soaring administration and costs, and a lack of clarity.

In a webinar hosted by Square Mile Investment Research and Consulting this week, Steve Kenny (pictured), chief distribution officer, and Anna Mercer , head of 3D research and member of the ESG Clarity EU Committee, discussed the considerations for the new regulations and the implications for advisers and asset managers.


The tone of the SDR discussion paper, released by the Financial Conduct Authority (FCA) last October, was “quite negative”, said Kenny, and “almost like the industry was already on the naughty step” as the regulator turned its focus to cracking down on greenwashing. The paper proposed three new sustainable fund labels, as well as new disclosure requirements for sustainable funds.

  • ‘Sustainable focus’ invests mainly in assets that are sustainable for people and/or planet,
  • ‘Sustainable improvers’ invests in assets that may not be sustainable now, with an aim to improve their sustainability for people and/or planet over time, and
  • ‘Sustainable impact’ invests in solutions to problems affecting people or the planet to achieve real-world impact.

The FCA closed its feedback period at the end of January and after many organisations made their responses public, including Square Mile, Kenny noted the ‘sustainable impact’ category had “caused the most controversy as it will be difficult for funds invested in public markets to apply this label”, but also flagged some major issues for passives and ethical/exclusion-based funds.

“With the three labels as currently described, we carried out a word search on the funds that have these labels in them – there were around 380 of them, which means less than a third of UK sustainable fund universe would qualify for the new labels.”

He added it is likely index trackers would not qualify for any of the labels, neither would ethical funds, some of which have been in existence for decades.

“Some of the oldest funds in the industry could be left behind. We have spoken to asset managers with these well recognised and supported funds, and they are very concerned the market is going to run away from them and embrace funds that are labelled,” he said.

He added it seemed little consideration had been given to how MPS or funds of funds would be categorised, and he was alarmed by the FCA’s lack of engagement with the advice market during the consultation.

Echoing sentiments from across the industry, Kenny and Mercer also flagged concerns around the ‘sustainable improvers’ category, aimed at funds backing companies in transition where stewardship is absolutely vital.

Anna Mercer, Head of 3D Research at Square Mile Investment Consulting & Research Limited

Mercer (pictured left) said: “How do you prove as an individual investor that you have had enough influence to make enough change – how do you separate that from the collaboration? How do you make that fund specific and then be able to say to retail investors this is what we have done?

“Also, there isn’t detail yet on what qualifies as meaningful engagement; a letter? Something else?

“For index tracker funds too, when they sit down and collaborate with companies they can have a big impact because of their presence, but they can’t prove that for each specific fund.”

It also has the potential to put smaller houses without huge stewardship teams at a disadvantage, they warned.

As the FCA begins to digest the industry feedback with the view to publishing a policy paper in June, Kenny added: “We are speaking to asset managers who say ‘we are scratching our heads on where we operate in a labelled universe, or how we use them at all’.”

Consumer Duty

Kenny said the broad consensus in the advice market around Consumer Duty was that it was “nothing more than TCF [Treating Customers Fairly] with a bit of fluff”, but he commented this is the “most misguided opinion they can have”.

Consumer Duty has been borne out of FCA concerns financial services are not always putting the consumer at the heart of their recommendations – it wanted to bring in a regulation that requires evidence that the consumer’s priority outcome is always in play.

Under the rules, firms must evidence they are delivering good outcomes for all retail customers. The outcomes have been divided into four categories:

  • Products and services
  • Price and value
  • Consumer understanding
  • Consumer support

Pointing to a quote from the Therese Chambers, director of consumer investments at the FCA, who said “we are constantly challenging firms to consider their current practices through the lens of the Consumer Duty,” and “a tick-box approach, will simply not be good enough” – Kenny said it is likely the regulator will be enforcing this regulation “aggressively”, which brings serious ramifications for the industry.

“We understand the FCA has already been carrying out spot-checks on firms this year. They will be visiting firms asking for reports and target market evidence. They will need to establish an audit trail on how they will achieve these outcomes.

“There is a lot of admin and costs, which means the cost of advice is going to go up.”

By 30 April, manufacturing firms – asset managers – will be required to provide target market and value assessments and then by 31 July 2023 Consumer Duty will apply to all new products and services. Firms then have another year to apply this to closed book products.

While Kenny said the aspirations of Consumer Duty are “admirable” it will cause more challenges for advisers and their clients.

“[Customers] will now have a lot more paperwork from their advisers justifying each part of the proposition.

“There is an obligation of duty for us to look through the whole process now, we can’t just say ‘I did my bit’ – that’s not an acceptable defence.”


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...