In-scope firms and products
Aside from the anti-greenwashing rule, which will apply to all regulated firms, the new rules on labelling, disclosure, naming and marketing and distribution will generally apply, or otherwise be relevant, to:
- asset managers for the purposes of the ESG rules – i.e. full-scope UK AIFMs, small authorised UK AIFMs, UK UCITS management companies and ICVCs that are UCITS schemes without a separate management company and portfolio managers (together referred to in the consultation paper and this briefing, for convenience, as "in-scope firms"),
- in relation to "sustainability in-scope business" – i.e. managing an AIF, managing a UK UCITS and (subject to some conditions) portfolio management,
- and so, in terms of products, this means unauthorised AIFs (including investment trusts), authorised funds (excluding feeder funds and funds in the process of winding up or termination) and portfolio management services (subject to conditions) which are collectively referred to in the consultation paper and this briefing, for convenience, as "in-scope products",
- where that business is carried out from an establishment maintained by the firm in the UK.
By way of reminder, "portfolio management" has an extended meaning under the TCFD-aligned rules in the ESG sourcebook: in addition to the regulated activity of discretionary portfolio management, it captures private equity and other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement the predominant purpose of which is investment in unlisted securities. That said, only some of new sustainability rules apply when the sustainability product is an agreement or arrangement under which a firm provides a client with such portfolio management.
Potentially out of scope asset management firms?
Firms with assets under administration or management which amount to less than £5bn (calculated as a 3-year rolling average on an annual assessment) are currently exempt from the climate related disclosures under ESG 2. Under the new regime they will also be exempt from the requirements relating to the sustainability entity report, but not – on the face of the rules as currently drafted – from the other new consumer-facing and detailed product-level disclosure requirements, at least not by virtue of their size alone. It is not clear whether this was the FCA's intention.
It may be fair to say, however, that – with the exception of the anti-greenwashing rule – for a manager of a fund that has no retail clients, which does not use any label, which has no sustainability objectives, and which has assets under management of less than £5bn there should not be any new requirements under the proposals. That said, before reaching such a conclusion, it may be safer to drill down further into the granular requirements – particularly, for instance, as regards the obligations of a UK AIFM, that manages an unauthorised AIF not listed on a recognised investment exchange, to meet client requests under the 'on demand' regime.
It is important to note that, for the purposes of this consultation, the FCA clearly states that overseas products are excluded from the in-scope products described above (although it is not entirely clear as to whether the technical definition of "sustainability product", which is essentially the same as the definition of "TCFD product" with some exemptions, quite achieves that carve out, for instance as regards unauthorised AIFs managed by UK AIFMs). The FCA intends to consult separately on extending the regime to overseas products.
Therefore, until such extension, it may be that aspects of the proposals will not have immediate significance for some firms in terms of their technical application (though of course investors may have their own priorities). For instance, the provisions that attach to portfolio managers (including the rules requiring them to link to information on underlying products) may not attach to a UK segregated portfolio manager acting under a delegation from an AIFM in respect of a Luxembourg or Irish fund. There will be other examples where "in scope" firms manage products that are currently out of scope. However, since an extension of the regime would seem to be inevitable, all firms should have regard to the proposals in the consultation since, once settled, they will form the foundations on which the extension will be built.
A note on the use of the terms "retail investors" and "institutional investors"
Throughout the narrative provisions of consultation paper, the FCA uses the terms "retail investor" and "institutional investor" when describing the application of certain parts of the regime, which makes sense given the focus on asset managers and funds. However, it should be noted that, in the draft rules, the terms "retail client" and "institutional client" are used instead. The Glossary definition of "retail client" means a client who is neither a professional client or an eligible counterparty; but the draft rules extend the existing COBS meaning of "client" to capture unitholders or potential unitholders in collective investment schemes and investors or potential investors in AIFs.
Like the consultation, we use the terms "retail investor" and "institutional investors" for convenience in light of the extended meaning of "client".
Scope and implementation of elements of the new SDR and labelling regime
In light of the above, and although the detailed rules should be referred to in all cases, the scope and application of the various components of the new regime can be summarised as below: