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

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. 

Baldwin said: “Consumers who invested in funds believing they were doing their bit to save the planet must not be made to bear the cost of moving if they find out their fund isn’t so green after all.

“We are concerned that the FCA has failed to take into account the substantial costs to the consumer of the measures included within this consultation. 

“Without even attempting to put a figure on these costs, it is difficult for the Treasury committee to take a view on whether the design of these proposals has been sufficiently considered.”

Baldwin asked the FCA to reply by March 23.

An FCA spokesperson said: “Consumers must be confident when products claim to be sustainable that they actually are. Clear labels will help consumers make an informed decision where to invest and regain trust in an evolving market.

“Our analysis strongly suggests that the benefits of consumers being able to invest in products which meet their preferences outweigh the costs.  

“We have set out our views on the costs and benefits. We received around 240 responses to our consultation – we welcome the committee’s engagement on this topic and we’ll consider all the feedback including theirs. When we publish the final rules, we’ll set out an updated views on the costs and benefits, including switching costs.”

Sustainability regulation

The EU was the first country to implement sustainable investment regulations in summer 2020, which included the Sustainable Financial Disclosure Regulation.

The UK decided not to implement the EU’s regulation in legislation since it left the bloc at the beginning of last year, instead choosing to work on its own taxonomy. 

It created a working group, the Green Technical Advisory Group (GTAG), to oversee the delivery of this including giving advice on developing the framework, supporting investors, consumers and businesses to make green financial decisions and clamp down on greenwashing. 

There was concern that the rules would be “perpetually kicked down the road” after they were delayed last year, however the FCA stuck to the timeframe announced in the delay, saying it wanted more time to examine the Securities and Exchange Commission’s own rules which had just been released.

The UK’s regulations go further than the EU’s regime, which has turned into a quasi-labelling system despite not being designed as one.

Regulators have been treading a careful line between pushing forward with their own reforms, and waiting for other jurisdictions to release theirs, to ensure asset managers and investors are not overwhelmed with conflicting systems.

Behind this is the urgency with which some think these measures should be enacted, to ensure the positive impact on the environment is not delayed any longer than necessary.

sally.hickey@ft.com