Financial advisers have not been explicitly included in the design of the Financial Conduct Authority’s (FCA) proposed labelling scheme to crack down on greenwashing, the Sustainability Disclosure Requirements (SDR), which, after several delays, is due to be in place before 2024.
Furthermore, there is still no prescriptive guidance or regulation (outside COB) that dictates best practice for integrating sustainability preferences into financial advice, for example, in respect to collecting information, like ‘know your clients’ (KYC) requirements. This leads to a number of problems.
We expect the adviser community to rely on product labels, once finalised, in their advice and suitability process. Given this, in its current form SDR is a missed opportunity in not explicitly including advisers in the consultation paper for the proposed labelling scheme.
It has the potential to address some of the main barriers faced by advisers. It could provide a framework to ask questions, a framework to assess relative suitability across different sustainable investment products, and reduce risk of bad advice due to a lack of expertise.
For the labelling scheme to work in retail clients’ best interests, the labels need to be easy to implement, present sufficient options (through effective dissecting of the sustainable product market), and produce a variety of options across the risk spectrum.
The proposed labelling scheme is likely to result in most funds and model portfolio services (MPS) crowding-in to the “sustainable focus” label, even if these carry very different objectives. In this case, the labels will not help the advisers with the suitability assessment significantly, as further analysis is necessary to differentiate within the label.
Additionally, the proposed scheme may result in higher-risk MPS and fund products attaining a label (especially ‘sustainable impact’), with fewer options for those clients taking cautious risks. Most clients do not have a high risk tolerance and this may exclude large parts of the retail client market from accessing suitable sustainable labelled products.
It is essential the scheme is set up to allow portfolio management services (or MPS) to attain a relevant sustainable label and to differentiate objectives.
Most retail clients will access discretionary sustainable products through this type of service rather than a single asset class fund. If only single asset class funds can meet the criteria and qualify for labels, this will likely skew consumers away from suitable investment choices to narrower and riskier mandates.
While we welcome regulation and guidance for portfolio managers, further work is needed to find a more pragmatic solution.
In terms of integrating sustainability preferences in financial advice, we have found advisers we work with are increasingly more willing and ready to offer different investment options for sustainability preferences – especially given Consumer Duty.
In our experience, advisers that have an interest and basic level of understanding are asking for and implementing sustainability preferences, those that aren’t do not (or remain client-driven). Advisers are scared to open a “Pandora’s box” of discussion about this sector.
There needs to be some FCA prescription over the expectations of advisers in respect to collecting information (for example KYC requirements) and educating clients about sustainability preferences in the advice process. We would welcome a demonstration of “best practice”.
This is evidenced by the fact the top of our adviser wish list is greater guidance on ESG/sustainability questionnaires and explicit links to investment products.