Ethical/SRIJun 12 2018

FCA to clarify rules for advising on green investments

Search supported by
FCA to clarify rules for advising on green investments

The Financial Conduct Authority (FCA) and the Financial Ombudsman Service (Fos) are to clarify how compensation claims regarding social impact elements of investments will be treated.

The government's industry taskforce on social impact investment, led by Elizabeth Corley, vice chair of Allianz Global Investors, today (12 June) published a report, which makes a number of recommendations to better enable people to invest in line with their values. 

In the document, the taskforce stated that the FCA and ombudsman "should ensure a joined-up approach is communicated to the adviser community," as these professionals are still unclear about how to talk to their clients about responsible investments.

In a letter to both institutions, Ms Corley argued that "financial advisers have raised questions about the jurisdiction of the Fos to deal with complaints relating to the delivery of social impact".

She said: "The concern is the risk that they might come the subject of a complaint to the Fos over social outcomes, which could be difficult to predict or measure.

"We understand that while the Fos focuses on complaints about financial loss they would consider complaints about social outcomes by referring to their Distress and Inconvenience Guidance.

"They would also take into account relevant legal requirements, best industry practice, as well as any guidance from the FCA on the role of non-financial factors."

Due to this, the taskforce requested that both institutions could comment on how distress in this context would be determined, and what possible penalties for the investment manager could look like.

In his answer to the letter, Andrew Bailey, the FCA's chief executive, said the regulator will work with ombudsman to provide clarity about the approach to "any complaints about social investments, and especially in respect of non-financial losses".

Caroline Wayman, chief executive and chief ombudsman at the Financial Ombudsman Service, confirmed this intention.

However, no timeline was given by any of the institutions.

The report, which makes a series of recommendations for government, regulators and industry players, also suggested that wealth managers and financial advisers should "incorporate relevant non-financial values and intentions questions into the client onboarding process, integrating social impact considerations".

The taskforce concluded that some independent financial advisers (IFAs) believe they are not permitted to talk to clients about non-financial investment motivations.

This may contribute to the fact that while some 47 per cent of IFAs think clients are at least moderately interested in social impact investing and less than 10 per cent report discussing it with a majority (greater than 70 per cent) of clients, the report stated.

The FCA has found the rules around 'suitability' broad enough to allow advisers to ask about a client's non-financial motivations, but many IFAs are still not confident on the point, the taskforce stated.

In addition, they are unclear on how to incorporate social impact investing into portfolios and about the possible consequences where social impact investments fail to deliver expected social returns.

When IFAs were asked what would help them to offer more social impact investments to their clients the top four responses were: CPD qualified training, tools to guide client conversations, practice guides from regulators and practice guides from professional bodies, the report added.

This is one of the reasons why another recommendation of the taskforce is that professional bodies, such as the Personal Finance Society (PFS), should "update their educational programmes to help advisers understand the spectrum of social impact investments and how to incorporate them into client portfolios".