SDR: Good things come in threes

I want to use this opportunity to focus on some of the expected regulatory changes this year, in particular those introduced by the Sustainability Disclosure Requirements (SDR) and investment labels.

Three ‘good’ things coming relate to three key dates for 2024: 31 May, 31 July and 2 December. All three are part of the implementation of SDR and all have an impact on advice firms. Let’s look at them in detail:

31 May: The anti-greenwashing rules come into effect. For some time, advisers have been worried about greenwashing from providers and the Financial Conduct Authority has listened.

Every FCA authorised firm is impacted, whether that be a large fund manager, boutique DFM and, yes, financial adviser

From 31 May, providers must run anti-greenwashing checks on all their material, presentations and documentation to make sure claims and descriptions are fair, clear and not misleading.

But the anti-greenwashing rules go much further. Every FCA authorised firm is impacted, whether that be a large fund manager, boutique DFM, mortgage provider, credit broker and, yes, financial adviser.

Advisers will need to make sure all their documents, websites and suitability letters have passed an anti-greenwashing check. Firms will also need to demonstrate the competence of the person undertaking the anti-greenwashing review. Ideally, they need to be independent of the document/web page/suitability letter author.

31 July: Not the first birthday of the Consumer Duty (which of course it is too) but the date fund managers can first begin using one of the FCA’s sustainability labels (Improvers, Focus, Impact or Mixed Goals).

All advisers must be ready to discuss the sustainability labels (and non-labelled funds and products) with every client

This date is crucial for advisers because, as required by SDR, all advisers must be ready to discuss the sustainability labels (and non-labelled funds and products) with every client. This is all about demonstrating clients have made an informed choice and to make a choice about sustainability, they need to be aware the labels exist. Advisers cannot wait for clients to discuss the labels, as that would assume all clients are well-informed about SDR.

Advisers will need to have a robust process in place to introduce the sustainability labels to all clients from 31 July.

Firms will have to show what material is provided to clients to explain the labels and then, during the advice process, advisers will have to capture each client’s views on sustainable investment.

Even if most clients do not want to invest sustainably (which they are completely free to decide), advisers must still record the decision and reference it within suitability letters.

For some time, advisers have been worried about greenwashing from providers and the Financial Conduct Authority has listened

2 December: Not all sustainable funds will be suited to a label, or the fund manager may decide they want more investment flexibility than the sustainability labels offer. If they use sustainability terms in the fund’s name or marketing material, then they will be classed as having ‘sustainable characteristics’.

Advisers need to include these funds as part of their due diligence process for clients looking for sustainable investment advice. The ‘sustainable characteristics’ funds are required to produce comprehensive disclosure and reporting, very similar to labelled funds. This will help advisers match client needs to the products/funds available.

Lee Coates OBE is a director of ESG Accord