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Although SDR is generally considered to be the UK’s answer to the EU’s SFDR, the two regimes are far from aligned. As firms grapple with the FCA’s recent consultation what is becoming clear is how hard it would be to comply with both together.
The EU Sustainable Finance Disclosure Regulation – known as SFDR and the UK Sustainable Finance Disclosure Requirements – or SDR – are both regulations that aim to increase transparency and disclosure around sustainable finance products and investments. SFDR, which has been up and running since March 21 applies to any financial market participant and financial advisor within the EU or to any third country firm marketing investment products and providing investment services into the EU. The proposed SDR, for which the consultation closes at the end of January, applies to all FCA-regulated firms offering in-scope UK products, including authorised funds, AIFs and portfolio services. So there will be a significant number of firms who need to consider the applicability of both the UK and EU requirements.
Although both stem from the same starting point, the SDR is more than just a disclosure regime as it sets detailed criteria when it comes to eligibility for use of its proposed investment labels. Conversely, SFDR requires firms in scope to categorise its products and/or services which then determine the type of product level disclosures required.
The FCA, acknowledging that firms may already have implemented SFDR, shows how one can map to the other in its consultation paper.
The FCA’s approach was intended to offer more clarity to asset managers in determining their appropriate label and related disclosures and also to investors in choosing funds that reflect their preferences. The above diagram also evidences FCA’s attempt to illustrate interconnectivity between its proposed regime and that of the EU.
But in preparing responses to the proposals in CP22/20 it is becoming increasingly clear that this read across, in practice, is not straightforward. The unintended consequence seems to penalise firms who endeavour to comply with both regimes.
For example a firm could have an investment product that is categorised as Article 8 or 9 under the SFDR but does not meet the qualifying criteria for the investment labels within the SDR. This could cause confusion in the market where a product is seen as sustainable according to one regime but not to another.
Meeting the criteria for the SDR investment labels in many cases will require some tweaks to existing investment strategies. But these tweaks could have a knock-on effect on those funds that are already categorised under SFDR, potentially creating a burdensome and confusing compliance cycle.
Another issue is that the qualifying criteria are much more complex and set a higher bar for in-scope investment products when compared to SFDR. This may lead to a diminishing market of sustainable investment products in the UK for investors as firms consider opting out where meeting the criteria will be too challenging. Compare this to SFDR where products are required to be categorised using relatively simple criteria. This will almost inevitably result in the EU apparently having more sustainable products in the market than the UK, surely both unintended and undesirable.
We can help
We can help you understand the SDR proposals and how they apply to your firm, and in particular how you can comply with both SFDR and SDR. You can catch up on our last webinar discussing the proposals or read our initial thoughts on the SDR consultation.
We are also preparing a response to the consultation of behalf of a number of our clients and are keen to hear more views. Get in touch to let us know your thoughts.
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