Implementing the new sustainability disclosure and labelling regime rules will have material cost implications for asset managers and advisers, due to the multiple resulting workstreams, according to Shantanu Naravane, a partner at law firm Herbert Smith Freehills.
Earlier this week, the FCA published its rules to curb greenwashing in investments and label sustainable funds to ensure that financial products that are marketed as sustainable should do as they claim and have the evidence to back it up.
The regulator also outlined the estimated compliance cost to all companies in scope, which are asset managers, advisers, platforms, and other authorised firms.
Estimated total one-off costs would be £204mn, while ongoing annual costs would be £34mn.
The estimated total one-off cost to the advisory sector is £128.3mn, or £23,000 per firm, while the total ongoing annual cost will be £9.2mn, or £2,000 per firm.
For asset managers, the total one-off costs depending on the sustainable label, ranges from £2mn to £14.2mn, and for the average cost per firm, between £16,000 and £351,000.
Total ongoing annual costs range from £1.5mn to £8.7mn, while the average cost per forms ranges from £10,000 to £217,000.
Navarane said: "Asset managers will need to scope out their product ranges to assess those which are impacted by the labelling and disclosure requirements, following which they will need to prepare the appropriate disclosures for in scope products on an ongoing basis."
"In addition, asset managers will also have to produce annual entity level reports. This is in addition to updates required to internal policies and procedures by both asset managers and advisers."
Dominic James Murray, chief executive of Cameron James, said while there would be a cost, this might prevent certain advisers from presenting themselves as “so-called” ESG experts
James Murray added: “I think the FCA's new policy is going to have a hugely positive impact on the sustainability fund industry over the long term. It can be argued, that, for too long, a range of 'ESG funds' have been sold to clients with big ESG claims and labelling, despite many of their underlying holdings falling far short.
“There will, of course, be an internal cost for implementing the new rules for advisers. However, this might help to stop many financial advisers from presenting themselves as so-called ESG experts, which will hopefully create more trust and transparency, particularly for clients considering defined contribution or defined benefit pensions transfers.
“This ESG policy has been due for some period and at Cameron James pleased to see it finally implemented.”
As part of the new labelling rules effective from 31 July 2024, the FCA has also introduced targeted rules for the distributors of investment products to retail investors in the UK, while it is also working on providing further guidance for advisers around suitability and how to build on existing capabilities in sustainable finance, including how the SDR and labels support advisers in their role.
Marina Reason, partner at Herbert Smith Freehills said distributors dealing with retail investors would need to make sure that relevant products they distribute were accompanied by the associated label and consumer-facing disclosure.
