Industry faces mounting to-do list as regulatory equivalence drifts ever further

There are a range of regulations for asset managers to wrestle with next year, but the recent Edinburgh Reforms may cause particular headache, alongside getting to grips with SDR and SFDR, while Consumer Duty remains firmly in the headlights.

Edinburgh Reforms

Managing associate at Simmons & Simmons James Wallace said that while it is “too early to tell whether there will be material changes” to the UK’s financial services as a result of the Edinburgh Reforms, few are anticipating equivalence.

Private markets to face reality check in 2023

“Smaller UK-focused managers may wish to capitalise on divergence from EU regulation, but international firms with operations in Europe may prefer alignment,” Wallace explained, adding that “complying with one set of rules is easier than complying with two”.

“For many asset managers root and branch reform is not an appealing prospect, especially with the uncertainty of a possible change in government at the next general election,” he said.

SDR versus SFDR

For most asset managers, however, the Level 2 SFDR rules implementation on 1 January 2023 presents the most urgent of difficulties.

Myron Jobson, senior personal finance analyst at interactive investor, described the effort of verifying ethical funds’ claims as a “pain” under the current disclosure regime.

“Not many people will have the patience (or inclination) to sift through documents relating to ethical funds to establish whether their credentials stack up,” Jobson said.

“In addition, the lack of common reporting standards, clear terminology and easy to understand classification and labelling makes it impossible for consumers to compare and accurately access and identify the products that align to their moral values.”

Recession looms over markets in 2023

The UK and EU’s respective SDR and SFDR regimes intend to make this assessment simpler for investors, but for the fund houses, the ever-developing task has created some issues.

Over the past few months, the industry has recorded a spate of downgrades from the darkest green SFDR Article 9 funds to Article 8, and from Article 8 down to Article 6.

Many who have sought clarification on SFDR may well be heartened at the long-awaited European Commission Q&As on “how some of the fundamental concepts of SFDR should be understood and applied”.

However, as Wallace said, the timing is “unfortunate” given the “huge amount of work [managers have put] into complying with the detailed Level 2 SFDR rules coming into force on 1 January 2023”.

“There will be many a Christmas or New Year’s wish that the goal posts do not move,” he said.

“The Commission has indicated it is also working on a comprehensive assessment of the implementation of the SFDR.”

On the UK front, Wallace said the regime was beginning to take shape, with the first TCFD climate disclosures due to be published by managers over the £50bn threshold next summer, and SDR rules set to apply from June 2023.

Steve Kenny, chief distribution officer at Square Mile Investment Consulting and Research, described the SDR consultation paper as a “positive move in the right direction”, but noted the focus on equity vehicles leaves the paper “not particularly well formed on fixed income”.

“The MPS regulations appear to have been an afterthought,” Kenny said.

“The FCA has not had active consultation with advisers as part of the process, which I think would have been helpful in the design of the regulations.”

Despite this, he describes the move as a “constructive development” but adds the divergence of SDR and SFDR could lead to “confusion” for advisers and customers.

Consumer Duty

A seemingly watershed moment for the industry, managers are at risk of misunderstanding Consumer Duty, and Kenny warns advisers not to treat it as “Treating Customers Fairly (TCF) mark II”.

“The rhetoric from the regulator, using phrases like ‘we intend to enforce this aggressively’, should cause advisers to sit up and take notice,” he argued.

“Firms will be judged by how they deliver outcomes, and this brings advisers into a very different universe.”

‘Scars’ of the energy play will linger in 2023

Simmons & Simmons’ Wallace also noted the regulation had “crept up on some portions of the markets”, with smaller and alternatives managers particularly guilty.

Richard Wilson, CEO of interactive investor, said Consumer Duty may well become a “Magna Carta for consumer rights”, adding it brought a “fundamental shift” that turns investment platforms into gatekeepers.

“The role of the investment platform just got bigger, and the best platforms will continue to relentlessly focus on delivering value for money around platform costs, service innovation, tools and impartial insights,” he said.

Alongside divergence of regimes, LTAF and ELTIF are another duo of rules to contend with, as Wallace noted the rate of regulatory change is “accelerating,” and while this may cause some issues, the industry should hopefully see some greater clarity on ESG.

He concluded: “Legislators, regulators and industry are finding their way in ESG and hopefully by the end of 2023 we will have a more settled position in Europe.”