Author: Andy Pettit
A host of new consumer-focused regulatory change is coming down the pipe in 2023, says Andy Pettit, Director, Policy Research, EMEA at Morningstar
Regulatory change has become a perennial feature for financial markets and by any standards, 2023 promises to be especially significant for firms and ultimately, for the investors they serve. Whether it’s the cultural change that the FCA is seeking from the Consumer Duty, the escalating fight against greenwashing in the ESG arena, or the growing focus on ensuring that products and services offer value commensurate with their cost, there’s something for everyone.
Consumer Duty
The most focusing event is the end July onset of the new Consumer Duty for all firms that influence consumer outcomes, from manufacturers, through distributors and platforms, to investment advisers. By now, firms should be well into their projects to identify what good customer outcomes will look like and the information needed to measure and evidence delivery.
The FCA is seeking four outcomes from the Duty – offering of products that meet customer needs; at prices that offer fair value; with the provision of the support that clients need; and ensuring consumers receive communications they can understand.
Enhancing Consumer Disclosures
The fourth Consumer Duty outcome of transparency and getting meaningful information disclosures to investors is an increasingly common thread running through much upcoming regulation. It’s clearly a laudable aim, but a big challenge to make sometimes complex information consumable and engaging for investors. The challenge has been no better evidenced than by the long-running saga of the Packaged Retail Investment and Insurance Product Regulation (PRIIPs) Key Information Document.
December’s Edinburgh reforms announced by the Chancellor confirmed that PRIIPs will be repealed as soon as possible.
Freed from its strait-jacket, the UK has a real opportunity to set new and market-leading disclosure standards. The quest has been quickly kicked off by the Treasury and the FCA, both issuing consultations open for comment until March 2023.
Interestingly, the U.S. is also embarking on enhancing its own disclosures, with recently announced SEC changes. Morningstar’s bi-annual Global Investor Experience Study has consistently identified the U.S. as a leader in disclosures across the 26 markets analysed, and can stimulate ideas as the UK embarks on its journey.
ESG Part 1: Doing What it Says on the Tin
ESG of course remains at the forefront of regulatory activity and firms can expect a new anti-greenwashing rule in the middle of the year. Reinforcing existing obligations to ensure the naming and marketing of products is consistent with the profile of those products, it will be followed by more prescription about the use of ESG-related terms in fund names and objectives, joining a theme playing out in other parts of the world including the U.S. and the EU.
ESG Part 2: Labels and Disclosures
Together with PRIIPs, new UK sustainability disclosures will herald the most visible post-Brexit divergences from EU regulation and will pose challenges both to firms making UK products available in the EU and vice versa.
Unlike the EU's Sustainable Finance Disclosure Regulation, which has seen its disclosure requirements evolve into unofficial labels, the FCA is proposing explicit consumer-facing labels, supplemented with new short-form consumer-facing sustainability disclosure documents targeted in addition to the more detailed SFDR-type disclosures.
Investment Advice
Financial advisers, on top of their Consumer Duty preparations, can expect to hear more from the FCA on a couple of key topics. Firstly, consultation has opened about introduction of a new category of simplified advice, aimed at making it cheaper and easier for firms to advise consumers about certain mainstream investments within stocks and shares ISAs.
Further work around the boundary between advice and guidance is expected to follow, while off the back of the sustainability labels and disclosure proposals, should come more clues about how clients’ sustainability preferences should be accounted for in the advice process.
Retirement and Pensions
The disclosure and ESG themes are also prevalent in the pensions arena. On the former, long-awaited pension dashboards due to start appearing by the end of August, giving people a consolidated view of their various pension plans and values. The latter will see many more pension schemes due to publish their first TCFD reports as part of the UK governments quest to lead on mandatory climate disclosures.
Summary
As is evident, there’s an awful lot of consumer-focused regulatory change coming down the track for regulated firms of all types. That’s without delving into the crypto arena and other potential Brexit-related developments. The goal-posts are also widening for the FCA and the Prudential Regulation Authority, as the government sets them additional secondary objectives of growth and international competitiveness.
We also note two particularly distinctive related features evident in the FCA’s work on both PRIIPs and ESG disclosures. Firstly, a move away from prescriptive, standardised documentation is mooted. This approach was first experimented with the Assessment of Value reports that asset managers have been publishing since 2019 and has met with mixed results, with some firms embracing the freedom much more effectively than others.
As a side-note and with reference to the Consumer Duty, these asset management firms have a head-start in preparing for the requirement to demonstrate that their products are offering value for the prices being charged.
Our second observation is that while there may be less prescription, industry participants are being invited to collaborate on designing consistent disclosures, following successful data-sharing formats for a range of MiFID and ESG data. The PRIIPs repeal even opens up the question of whether distributors should have some level of responsibility alongside manufacturers, for producing product disclosures.
Overall, despite the volume of change, as firms prepare we do see some discernible positives in the growing alignment, consistency and cross-referencing of the issues that straddle the different regulations affected.
