RegulationMar 9 2023

FCA's sustainable labels could result in higher consumer costs, MPs warn

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FCA's sustainable labels could result in higher consumer costs, MPs warn
Harriett Baldwin, who has asked the FCA to provide more details on how its sustainability regulations will change costs for consumers (Photo: House of Commons)

The regulator's new sustainable investment rules may end up increasing costs for the end client, MPs have warned.

Harriett Baldwin, MP and chair of the Treasury committee, wrote to Nikhil Rathi, chief executive of the Financial Conduct Authority, to ask that the City watchdog provide a detailed cost-benefit analysis of the proposed regulation.

The draft rules outline three different labels retail funds can use to indicate to consumers the level of sustainability of the underlying holdings.

The regulation includes three labels for sustainable products: ‘sustainable focus’, ‘sustainable improvers’, and ‘sustainable impact’.

Consumers must not be made to bear the cost of moving if they find out their fund isn’t so green after allHarriett Baldwin, MP

In the letter today (March 9), Baldwin said the current cost benefit analysis provided by the FCA for the regulations does not take into account three ways it will cost the consumer.

The first is the extra cost to the consumer due to the time spent reconsidering which products they wish to invest in, and any potential transaction costs incurred by selling investments that no longer meet their requirements, and buying those that do.

Baldwin said the FCA also makes “no attempt” to evaluate the extra costs to the consumer through the spreads at the point of buying and selling funds. Those selling funds will be sold at the lower selling price, and the new investments bought will be at higher buying prices.

Finally, she warns that the regulator has not included any of the potential costs that may arise if the new disclosures change the fundamental price of the funds themselves.

“It is possible that at the point when a fund ceases to be able to market itself as 'sustainable', it will experience a large-scale simultaneous exit from investors who have mandated their asset managers to only invest their money in “sustainable” funds,” Baldwin said.

A large-scale divestment from a fund could lead to a rebalance of the fund, or even a fire-sale of assets at a lower price if the fund’s managers are forced to sell to meet withdrawals. 

The committee warned that the regulations could have the most impact on victims of greenwashing, who discover the funds they are invested in do not reach their own sustainability standards once the regulations are in place.

In an evidence session yesterday (March 9), MPs asked the regulator how it will tackle funds which have misled customers.

They also warned that there could a risk that tighter regulations may drive funds away from investing sustainably, or out of the UK, reducing choice.