Treasury sub committee in 'shock' over FCA's sustainable mis-selling omission

An evidence session was hosted by the Treasury Committee's Financial Services Regulations Sub-Committee this week to examine the FCA's proposed SDR reforms. At the session, the chair of the investigating committee expressed her "shock" at the regulator's lack of research into the potential cost implications for retail investors of its fund labelling proposals.   

Harriett Baldwin, chair of the Treasury's sub-committee on financial services regulation, asked Sacha Sadan, the FCA's director of ESG, and Mark Manning, technical specialist for sustainable finance and stewardship at the FCA, if they had calculated the potential costs to consumers of switching out of funds that fall short on sustainable credentials. 

Baldwin asked: "You are going to have a lot of consumers who thought that they were invested in something that was green, and they're going to be told, as a result of these changes, that it's not the case anymore.

"What are going to be the costs to those investors? Since they have gone to the effort of investing in what they thought was green, they are going to probably have to now switch into something else - have you worked out what the cost to them is going to be versus the potential benefits? Have you looked at what that cost will be?"

Manning replied: "We have not got a figure for that... It is quite a theoretical exercise at this stage."

Manning acknowledged that such costs were "not going to be zero" before assuring the sub-committee that many consumers would be "quite happy" investing in a product that is "considering sustainability factors, but not actively pursuing a sustainable objective".

Baldwin continued to ask for clarity on the topic. "But you do acknowledge that there will be some consumers who will be affected, [who] will incur a cost that they were not anticipating and that you have not done any work on what that loss might be?"

Seeking to assure the 11 sub-committee members of the FCA's overarching aim for the SDR, Sadan said, "We are raising the bar to make sure [investors] get what they need."

Baldwin retorted: "But they are not getting it…and there is going to be a cost, but you have not worked out what the costs are estimated to be, or even tried to estimate what the cost is going to be".

Turning to consumer compensation, Labour MP Rushanara Ali posited whether such costs should be met in the form of reimbursement. She asked: "Should the companies that have basically lied to people be bearing some of those transaction costs?"

Likewise, the former Conservative secretary of state for business and energy, Andrea Leadsom, pushed the FCA members to share their intentions for retributive action.

She said: "Just to be clear, it is not your intention to fine an investment manager that had described a fund in a particular way that was no longer accurate? You would not be allowing them to be accused of mis-selling?"

Sadan responded: "Not because of these rules, but if it was not fair or misleading, then we still have the powers to be doing that anyway."

The hearing continued with questions surrounding the SDR's interoperability with other regimes and requirements for consumer-friendly language, but in Baldwin's closing remarks, she circled back to the regulator's omission on costs.

She concluded: "I think this has been an eye-opening session for the committee. We have certainly learned a lot. I do particularly express shock that you had not thought about the cost, either for the industry or for the consumer, in terms of any of the communication and also some of these important questions around enforcement... but I know we will be following up with you on some of those questions."

This article first appeared at Investment Week.