Industry Updates

FCA reveals fourth SDR label in final rules

‘Mixed goals’ category launched for blended strategies

Theo Andrew

Financial Conduct Authority FCA

The Financial Conduct Authority (FCA) has unveiled a fourth category under its Sustainable Disclosure Regulation (SDR) as it published its long-awaited final rules.

The new label, ‘Sustainability Mixed Goals’, is an additional category from the three originally proposed by the regulator and brings into scope multi-asset funds with different sustainability objectives, also known as ‘blended strategies’.

It will sit alongside the three other labels, ‘Improvers’, ‘Focus’ and ‘Impact’ and comes after the asset management industry's feedback that the initial proposals were too narrow.

Galina Dimitrova, director for investment and capital markets at the Investment Association, welcomed the broadened scope.

“We are pleased to see that the regulator has listened and taken a broader approach on several key issues, such as the accommodation of mixed-asset funds within the labels and greater flexibility over marketing rules,” she said.

Elsewhere, the FCA also introduced more flexibility under the fund naming and marketing rules.

Labelled funds will be required to have a minimum of 70% of assets that align with the fund’s sustainability objective, down from proposals of 100% published earlier this year.

The FCA said the remaining 30% would allow funds to provide liquidity and portfolio management services while remaining aligned to the label.

The initial high minimum was seen as a barrier for ETFs and index tracking funds with respondents noting it may be difficult to make sure index providers' methodology aligned with the sustainability objective.

“This will need monitoring going forward to allow tweaks should 70% appear too restrictive, especially for those in more defensive strategies where cash and bonds can be harder to classify as sustainable,” Gemma Woodward, head of responsible investing at Quilter Cheviot, said.

The regulator said it would continue to consult on anti-greenwashing rules to ensure sustainability claims are “fair, clear and not misleading”. It is expected to come into force in May 2024.

Despite the changes, it is not yet clear if or how SDR will apply to wealth managers, overseas funds or pension products with further consultations planned in the future. 

It said the proposed approach would not be suitable for most portfolios with many unlikely to invest in only UK funds.

Overseas funds are not in scope but the FCA said it would like “all firms marketing their products in the UK to be subject to the same broad requirements”.

“We will continue working with Her Majesty’s Treasury to understand the options for extending the regime to overseas recognised funds, including those marketing under the Overseas Funds Regime.”

Firms will be able to use labels from 31 July 2024 – faster than the 12 months previously anticipated – while the naming and marketing rules will not come into force until December 2024.

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