Advisers have been bombarded with messaging and marketing material regarding environmental, social and governance investing and sustainability in recent years. If anything the trend has accelerated during the pandemic.
It is obvious that some fundamental changes are happening in terms of the approach of asset managers.
There has been a steady stream of regulatory initiatives emanating from the Treasury and other government departments and regulators, including the Bank of England and the Financial Conduct Authority.
The EU, in keeping with its reported ambition to be a regulatory superpower, is also moving forward with a huge number of multifaceted initiatives and regulations.
Yet what you might describe as the hard regulations around advisers, suitability and sustainability may have become something of a casualty of the Brexit process at least for now.
UK ESG suitability rules could take as long as two years to materialise
The EU is moving ahead with requirements for European advisers to consider sustainability as part of suitability from March. The incoming requirements are amendments to Mifid II and separate from the Sustainable Finance Disclosure Rules, which also come into play in March and require fund groups to disclose information about the ESG risks in their portfolios.
However, the UK is no longer directly involved and no longer a member state having left the EU’s regulatory ambit at the turn of the year. An extension to the transition period would have been a different story.
There has been speculation first that the UK would mirror the EU move or that there would be long delays.
One public affairs expert Portfolio Adviser spoke to believes that it strains credibility that any UK regulation could be in force by March, given the timetable and the need to consult. Indeed, they suggest the process could take as long as two years.
See also: Do EU green deal disclosure requirements risk being a productivity drain?
Memorandum of understanding could shed some light
One potential pinch point comes at a very high level in terms of financial services and access to EU and UK markets.
The Brexit deal was primarily concerned with trade in goods and even that has not been without teething problems. Services including financial services were not included.
A memorandum of understanding (MoU) covering financial services is expected in March. It may set out important aspects of the future relationship and upon which other agreements may depend.
Interestingly, while the UK has created a temporary permissions regime for EU and European Economic Area firms to continue to trade or facilitate an orderly exit, the EU is yet to agree equivalence for UK firms allowing them to operate in Europe. Some of the language from Commission documents is a little frosty suggesting that the UK move was in its own interests and that the EU will base any equivalence decisions on its own interests too.
Yet advisers with a domestic focus delivering advice in Sunderland or Solihull, might be forgiven for asking why such high-level considerations should leave them in limbo.
Fund groups looking for consistency in what and how they report
There are some hopes for more clarity.
“My understanding is that the FCA is planning for everything on ESG to be pretty consistent with the rest of Europe,” says Mikkel Bates, regulatory manager at FE Fundinfo.
“I don’t think anyone is holding out too much hope for the MoU to resolve everything/anything. With Mifid II embedded here and nobody wanting to be seen as soft on sustainability, there is likely to be a similar focus here.
“Also, fund groups will be looking for a high degree of consistency in what and how they need to report, whether that’s for Mifid through the European Mifid Template and other templates or through fund reports. Many fund groups have matching funds for the UK and Europe now and will want the same obligations to apply to both.”
FCA unable to confirm when amendments to suitability rules will be looked at
Portfolio Adviser then spoke to the FCA. They were not able to provide a firm date. However, they did refer us to a speech from FCA chief executive Nikhil Rathi last November, in which he said: “As this market grows we want to ensure that consumers can trust sustainable products. To do this firms need to be clear on their obligations around the design, delivery and disclosure of sustainable products. And consumers should receive the right information and advice.”
A spokesperson then added: “The Commission amendments to the suitability rules to take account of ESG change as part of Mifid that is now in Treasury legislation rather than our Handbook. Therefore, a decision about amendments to those provisions in the UK currently rests with the Treasury.
“Both ourselves and the Treasury are committed to the same sort of goals as expressed in the EU’s Sustainable Finance Action Plan from which these amendments stemmed. We remain supportive of making sure the financial services sector plays a role in sustainability.
“Amendments to the suitability rules to reflect sustainability concerns are therefore something which is likely to be looked at, but the timing of any policy proposals emerging from that consideration is not currently known.”
Advisers may have to make up their own minds about how strong a steer that is.
