2022 was quite the year for regulatory change and the relentless pace of the previous quarters reached a crescendo in the last quarter. We saw the embedding of the EU Sustainable Finance Disclosure Regulation (SFDR), the ongoing development of the European ESG Template (EET) full, the end of the UCITS KIID in Europe, continuing of the post BREXIT divergence between the EU and UK in regulation and in this context the progress with UK FCA led Consumer Duty. This also feels like an ongoing theme for 2023.

PRIIPs – a new beginning?

The 1^st January 2023 saw the long-awaited implementation of PRIIPs Key Information Document (KID) end, which signalled the end of the requirement to produce a UCITS Key Investor Information Document (KIID) in the EU.

There has been a lot of work toward the end of 2022 across both fund houses and solutions providers to ensure that the data and build for the new PRIIPs KID were appropriate. At a high level, we saw a change to performance scenarios and changes to various calculation methodology within the KID, which has led to a data sourcing and assurance exercise across all firms. We expect that work will be ongoing to ensure that all KID’s accurately reflect what is expected, with activity stretching into the early part of 2023. Not to be overlooked is the requirement to hold performance scenario information, which is located within the KID, on product websites. There is a requirement not only to hold this information, but controls must be in place to ensure parity with the KID document.

Remember, if you distribute a UK UCITS into the EU, you will need to produce a PRIIPs KID for your product. Conversely, if you distribute an EU UCITS into the UK, you will need to produce a UCITS KIID. To add additional fuel to the fire, on 9th December 2022 the HM Treasury in the UK released a consultation paper on PRIIPs and UK Retail Disclosure. The main aim from the consultation is to repeal the PRIIPs regulation as a matter of priority and a move away from a prescriptive, standardised document towards greater flexibility and tailoring to meet the needs of retail clients. The consultation remains open until the 3^rd March 2023.

EU SFDR – what’s next?

Another major deliverable within the EU was that related to the Sustainable Finance Disclosure Regulation (SFDR). With key ‘go-live’ requirements on the 1^st January 2023 being website requirements, and the creation of pre-contractual disclosure documents and periodic reporting for article 8 and article 9 products. 

The requirement to submit pre-contractual disclosures alongside a prospectus submission prevented a ‘big bang’ approach for most firms. Luxembourg and Irish domiciled products were required to submit these documents to the regulators in advance of the 1^st January 2023 effective date. The three key requirements for firms to ensure that the qualitative and quantitative information contained therein:

• Is available and accurate;
• Has appropriate governance sign-off; and,
• Is consistently aligned to the other SFDR-related documents.

Anything qualitative in the pre-contractual requires quantitative disclosure in the periodic report. A high degree of oversight is therefore required to not only ensure consistency, but to ensure that the numbers provided are appropriate and not damaging in the future relating to any potential for greenwashing. 

The next key developments are the more quantitative driven periodic disclosures, effective for any fund that produces annual Report and Accounts from the 1^st January 2023. A key challenge will be ensuring that the data gathering, and the calculation methodology is clearly communicated, and available for clients to review.

ESG – balancing regulatory requirement with client expectations

Balancing regulatory requirements and client expectations is going to need some consideration.

A prime example of this is the European ESG Template (EET). The aim of the EET is to facilitate communication of portfolio ESG characteristics between product manufacturer and distributor in a consistent, machine-readable format. Whilst the EET is not a regulatory requirement, there is a substantial effort required to populate the significant number of data points therein. All information should align to SFDR requirements. So close attention should be given to the population and ongoing assurance of the data contained within the EET.

 Another area we are seeing client expectation is for key documents in multiple languages, including the website disclosures. Whilst not a firm regulatory requirement, there is a client demand to ensure appropriate servicing of clients in different jurisdictions that products are distributed.

ESMA – consultation paper (CP) on Guidelines for naming funds

An important development for close review is the European Securities and Markets Authority (ESMA) consultation paper (CP) on Guidelines for naming funds using ESG or sustainability-related terms. The Guidelines seek to ensure funds’ names accurately reflect the investment objectives, policy and strategy of the fund as described in its documentation and reduce the potential for greenwashing. The key proposals are:

• For a fund to have ESG-related terminology in the name, a minimum proportion of 80% of investments should be used to meet Environmental or Social characteristics, or sustainable investment objectives.
• If a fund has the word “sustainable” in its’ name, or any terms derived from this, it too will require this 80% minimum threshold, with 50% of this coming from the SFDR definition of ‘sustainable investments’.
• The timeline for implementation is anticipated to be quarter 2 or 3 in 2023. 

The impact of the consultation has the potential to be profound, through the potential for a significant number of SFDR fund classification downgrades. It has been mooted that as much as 80% of Article 8 products may not meet the proposed thresholds. The consultation closes on 25^th February 2023.

UK SDR – don’t take your eye off the ball…

The FCA released a consultation paper on Sustainable Disclosure Requirements (SDR) at the end of October, with primary focus on reducing greenwashing and improving trust in the sustainable finance market within the UK and wider. The FCA identified 5 key areas:

1. Introduction of labels. The FCA proposed 3 sustainable product labels with different proposed thresholds to meet the labelling requirements:

• Sustainable Focus: funds must at least have 70% of product’s assets meet a credible standard of environmental and social sustainability.
• Sustainable Improvers: Products that invest in assets that may not be sustainable, but with an aim to improve their sustainability over time.
• Sustainable Impact: Products that invest in solutions to problems affecting people and/or the planet to achieve real-world sustainable impact.

2. Restrictions on terms. This relates back to greenwashing and prohibits the use of certain terms for products. Examples: ‘climate’, ‘impact’, ‘sustainable’ or ‘sustainability’, ‘responsible’, etc..

3. Consumer facing disclosures. This will provide details to help consumers understand the key sustainability-related product features.

4. More detailed disclosures. Not too dissimilar to the SFDR, we will see pre-contractual (for those with and without sustainable labels), ongoing suitability-related performance information, and entity level disclosures within a set template. 

5. Distributors. For labelled and unlabelled products, distributors must ensure that products provide end consumers with relevant information on the product in all digital mediums.

The consultation period closes on 25^th January 2023.

FCA Consumer Duty – the road ahead

A brief reminder, the Consumer Duty aims to fundamentally improve how the industry serves customers through the introduction of a new FCA Principle and four new outcomes for regulated firms.

The first key milestone for implementation of FCA Consumer Duty, where boards had to challenge the implementation plan, is now complete. The first quarter of 2023 looks to continue the momentum as we approach the full implementation deadline for product manufacturers on 30^th April 2023. By then, the FCA expects that manufacturers:

 “…should have completed all the reviews necessary to meet the outcome rules for their existing open products and services so they can share with distributors to meet their obligations under the Duty and identify where changes need to be made.”

 For manufacturers, the deadline is fast approaching while there are still concerns and confusion across the industry to meet implementation requirements. Most firms will benefit from equivalence between the Consumer Duty and existing product governance rules (FCA PROD), and their value assessments for authorised funds. The key issue relates to evidencing adherence to the Consumer Duty through effective Management Information (MI), which may need to be sourced from third parties.

 Consumer Understanding will be a challenging area for manufacturers due to the nature of MI required to accurately evidence effective communication with the consumers. The FCA has recommended that firms should begin engaging with this outcome as soon as possible to ensure they can achieve this. From April, firms will be required to ensure that their customers are not only aware of information surrounding products and services, but also understand this and how this relates to them, their situation and suitability. This will need a higher standard of consumer testing.

 Distributors on the other hand are having to wait for manufacturers before they can do so themselves. Ongoing engagement and communication between manufacturers and distributors will be to ensure smooth implementation. Doing so will help to identify and address any potential challenges before the three-month window for distributor implementation.

Available! Broadridge ESG and PRIIPs KID Solutions

Broadridge Fund Communication Solutions has extensive expertise in managing fund data and understands the challenges involved. We offer ESG and PRIIPs KID solutions, providing complete support for all aspects in the composition, maintenance, and document distribution of both documents in all jurisdictions. Benefit from increased operational and cost efficiencies across your business with Broadridge Fund Communication Solutions as your single digital platform, supporting all your data, documents, and regulatory reporting needs across the life cycle of funds.