Contents:
- Sustainability rules for portfolio management
- Bundling of research and execution consultation
- Social media promotions
- New consumer duty legislation
- FCA and Bank of England joint projects
- FCA findings on Woodford Equity Income Fund (WEIF)
2024 has certainly had a busy start in the financial services sector. To highlight recent changes and developments, we have summarised some notable topics which financial services businesses should be alert to.
Sustainability rules for Portfolio Management
Consultation Paper (CP/24/8) outlines FCA proposals to extend the Sustainability Disclosure Requirements (SDR) to Portfolio Management Services. This is an extension of the anti-greenwashing rules which already apply to fund managers. These new requirements would apply to firms providing services to clients for:
- Managing investments; or
- Private equity or other private market activities which comprise 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.
The proposals extend SDR requirements to cover all portfolio management services, including those providing model portfolios. The consultation paper shares this helpful diagram showing the implementation of the SDR rules.
The naming and marketing rules apply mainly to products offered to retail clients. They also apply when firms use labels or sustainability-related terms. Firms must produce:
- consumer-facing,
- pre-contractual, and
- detailed product-level disclosures
… and either publish them or provide them to their clients.
In May 2024, the FCA released finalised guidance (FG24/3). This clarifies the disclosure requirements under anti-greenwashing rules. The guidance contains four key principles
- Claims should be correct and capable of being substantiated
- Claims should be clear and presented in a way which can be understood
- Claims should be complete – they should not omit or hide important information
- Comparisons should be fair and meaningful
The guidance contains examples and further details, so please see the FG24/3 paper for more information.
Bundling of research and execution
In 2018, the FCA introduced rules that prevented the bundling of research and execution services. The aim was to reduce undisciplined spending on duplicate or low-quality research and avoid opaque charging structures.
These rules were recently rolled back for certain investments, and there is a further consultation paper (CP24/7) that would relax the rules further – albeit with ‘guardrails’ in place.
The consultation is in response to an independent government review on the effectiveness of the UK financial research market by Rachel Kent.
This report led to several recommendations, one of which is the option for buy-side firms to purchase research bundled with execution services.
The requirements on firms in relation to this new option would include them establishing:
- A formal policy on the use of the approach
- A budget for the amount of third-party research to be purchased
- Ongoing assessments of research value and price
- An approach to the allocation of costs across their clients
- A structure for the allocation of payments across research providers
- Operational procedures for the administration of accounts to purchase research, and
- Disclosures to clients of the firm’s approach to bundled payments, their most significant research providers, and the costs incurred.
This is currently in the consultation phase only, so finalised guidance will follow after responses have been collected.
Social Media
Finalised guidance FG(24/1) reiterates rules for financial promotions through social media channels. Firms are already bound by rules concerning financial promotions. These vary depending on the product, industry and target audience.
The guidance paper’s rules clarify that firms should carefully consider how material on social media is distributed when designing financial promotions. For example, firms should ensure that their original communication still supports consumer understanding, even if it ends up in front of a non-intentional recipient through third-party sharing.
Firms using social media to promote financial services are advised to read the guidance. FG24/1: Finalised guidance on financial promotions on social media (fca.org.uk)
Consumer duty
The new consumer duty legislation came into effect in July 2023. The FCA has published findings of a review into how well firms have implemented these rules. The full wording is here: Consumer Duty implementation: good practice and areas for improvement | FCA, but in summary, the areas for improvement were:
- Some firms had dealt with this in their compliance teams but had yet to permeate it throughout the firm, especially at the board level.
- Better monitoring and collection of data concerning consumer outcomes.
- Greater proactivity in addressing issues, rather than waiting for the FCA to identify them.
- There should be greater consideration when dealing with vulnerable consumers. Firms should have methods of tracking these consumers across their product ranges. They should not ask for unnecessary information from this group or ask them to self-assess.
- Some firms are charging consumers a fee for services they do not need or are not benefitting from.
The article also includes the positive outcomes, so it is a worthwhile read for all firms within scope.
Other news
FCA and Bank of England joint projects
The FCA is working on a long-term project with the Bank of England on Transforming Data Collection (TCD). This project aims to improve all aspects of data collection from firms, including making data points clearer, only collecting relevant information, and improving technology.
The FCA is also consulting with the Bank of England on a Digital Securities Sandbox (DSS) to test how regulation of innovative technologies (such as distributed ledger technology) may work.
Crypto assets are likely to be brought within FCA scope soon, and this is a stepping stone towards that goal. This DSS also applies to the settlement of shares and securities using distributed ledger technology.
Woodford Equity Income Fund (WEIF)
The FCA has published long-awaited findings on link fund solutions (LFS) with respect to the Woodford Equity Income Fund (WEIF).
The FCA found that LFS failed to manage the fund’s liquidity or how easily assets in the fund could be turned into cash so investors could access their money at short notice.
The FCA would have imposed a fine of £50m, but this would have reduced the funds available to compensate investors. Those who invested in the WEIF when it was suspended are starting to receive a share of the up to £230 million redress scheme, which was approved by the High Court in February.
CAN WE HELP?
If you would like to discuss any of these developments or have questions for our specialist Financial Services team, please do get in touch.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
Copyright © Shipleys LLP 2024
Related Resources
Financial Services Update – December 2023
Financial Services Update – September 2023
Financial Services Update – May 2023
