Implied new disclosure standards for so-called ‘integrated financial products’ stray well ‘off-piste’, according to a funds management industry body.
Simon Haines, Boutique Investment Group (BIG) chair, said the just-released Financial Markets Authority (FMA) disclosure recommendations for funds labeled as sustainable and ethical etc go too far into a legal grey zone while offering no clear benefit for consumers.
Haines said while the FMA is “absolutely right to be involved in the conversation”, the detailed disclosure expectations laid out in the recent regulatory review risk adding rigid, complex reporting rules to a fast-changing, ill-defined set of investment market practices.
“Both industry and the regulator are skiing off-piste and we have to do the best we can to convey something that is useful in a difficult situation,” he said.
“Therefore I think that any guidance or findings coming from the regulator needs to help foster an adult conversation about where that sweet spot is between accuracy and simplicity is so we can say something to our customers about what we are doing that is mostly right, but that is also comprehensible and digestible to an ordinary human.
“This particular guidance does not help to achieve that outcome.”
Last week the FMA published findings from its review of the disclosure practices of 14 licensed funds managers offering integrated financial products (IFP) – the catch-all phrase concocted to contain investment labels such as responsible, sustainable, ethical and environmental, social and governance (ESG).
The regulator launched the IFP probe to follow-up on industry compliance with guidance released late in 2020 that provided a broad overview of such product disclosure obligations.
However, the latest FMA report offers in-depth details of expected manager disclosures across official product documents as well as marketing materials.
“We have clearly stated our expectations for IFP Funds, and the reasons for those expectations. This report has established that Managers of IFP Funds have a lot of work to do and we now expect them, assisted by their supervisors, to take the necessary care not to mislead or confuse investors with greenwashing,” the review says. “This is an area the FMA will continue to monitor to prevent complacency and the entrenchment of poor disclosure.”
While the FMA justifies its anti-greenwashing efforts on the back of ‘fair dealing’ provisions in governing legislation Haines said the legal position remains unclear.
“The discussion of the ethical, social and climate dimensions of investments is an area where; the law hasn’t yet developed (for example there is no part of the PDS for a managed fund ear marked for talking about these topics), the international standards and methodologies are all moving around, the data is patchy, the products are new to mainstream, people everywhere are using the same words to mean different things,” he said.
“Because of that context, it is probably not possible for anyone anywhere to make laboratory grade correct and verifiable statements about this aspect their products without providing reams of technobabble and caveats. Yet saying nothing about what we are doing is not an option either. The market is demanding us to say things about this dimension of our products in a comprehensible way.”
But Paul Gregory, FMA director investments, said the onus remains on managers to clearly explain both the rationale and ongoing impact of ‘non-financial’ factors on funds offered under IFP-type labels.
“If managers consider it meaningful enough to use [IFP terms] in a fund name than it should be bourn out in disclosure,” Gregory said.
Research commissioned by the FMA found consumers mainly rely on labels when selecting IFP funds, adding more weight to the argument for better disclosure, he said.
Yet the scale and scope of suggested extra disclosure has set the regulator at odds with many in the industry such as BIG, which represents compliance experts from 20 or so local investment managers.
The FMA has also received push-back after pursuing specific actions against the 14 unnamed managers in the IFP review with some reactions “more legalistic” than others, Gregory said.
It is understood some other managers are already considering renaming products in the wake of the FMA review.
“The outcome in the market might be more substantiation [of IFP claims] or managers drop the labels from products,” Gregory said.
Regardless of the FMA pressure on local licensed fund managers, NZ investors would still have access to a broad array of IFP-labeled funds that fall outside the ambit of the regulatory guidance, according to Implemented Investment Solutions (IIS) chief, Anthony Edmonds.
Edmonds said many Australian unit trusts offered in NZ under the trans-Tasman Mutual Recognition regime would be able to operate under different IFP disclosure rules.
“There’s a danger of creating a two-tiered system,” he said. “We’re already hearing concerns from some of our fund-hosting clients that the disclosure that they use for their sustainable funds in Australia will have to different for the NZ market while those offered through mutual recognition won’t be required to change.”
The Australian Securities and Investments Commission (ASIC) also issued updated ‘greenwashing’ guidance for fund managers this June that covers some of the same ground as the FMA version.
Greenwashing has emerged as a global regulatory issue of late with ESG products, and the like, garnering huge investment flows.
Australian research firm Plan for Life (PFL), for example, found as at the end of March this year ‘responsible’ products represent $16.1 billion of retail funds under management – or 11 per cent of the total market.
The sector has “defied fluctuating investment markets to post significant” compound annual growth of more than 27 per cent over the last five years, the PFL report says.
And while Edmonds said such funds need to clearly explain any claimed benefits, the disclosure of non-financial factors should not obscure overarching investment strategies.
“It seems the FMA is losing sight of the fact that sustainable funds – or whatever you want to call them – are first and foremost investment products and disclosure should reflect that,” he said.