FCA Discussion Paper: ‘Sustainability Disclosure Requirements and Investment Labels’ (DP21/4) Innovate Finance response
About Innovate Finance
Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.
The UK FinTech sector encompasses businesses from seed-stage start-ups to global financial institutions, illustrating the change that is occurring across the financial services industry. Since its inception in the era following the Global Financial Crisis of 2008, FinTech has been synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally changed the way in which consumers and businesses access finance.
Innovate Finance welcomes the opportunity to respond to the FCA’s Discussion Paper ‘Sustainability Disclosure Requirements and Investment Labels’ (“DP21/4”). Innovate Finance considers that FinTech has a central role to play in supporting the transition to a Net Zero economy: creating tools and infrastructure, which will allow businesses to develop Net Zero-related products and services and ensure compliance with climate risk related regulations; enabling consumers to take action that aligns spending and investment with Net Zero outcomes; and embedding Net Zero in capital markets, so that capital is deployed to meet climate-related targets.
While the majority of Innovate Finance’s membership body is not directly in-scope of the FCA’s proposals, we welcome greater transparency and a standardised approach to disclosures and reporting for Environmental, Social and Governance (“ESG”) matters. Innovate Finance considers that greater access to data will be critical to the success of the transition to a Net Zero economy, and we would call on the FCA to work with other regulators and government to build on facilitating access to data, which goes beyond the proposals outlined in the Discussion Paper.
Our response to the Discussion Paper is structured in terms of headline submissions, and we would be happy to discuss this response in more detail with the FCA and/or facilitate discussions directly with our members and the wider FinTech ecosystem.
Access to data and enhanced data analysis will drive successful Net Zero outcomes, facilitate further innovation and accelerate the need for regulators to embed Supervisory Technology
In line with aspirations set out in both the FCA’s Data and ESG strategy documents, Innovate Finance encourages the FCA to:
- Share - subject to market participants’ consent - anonymised, aggregated data sets, and make it mandatory to provide disclosures in a machine-readable format. Making it mandatory to provide disclosures in a machine-readable format would allow for ease of monitoring and supervision of the new regime, more efficient data analysis, and create new opportunities for regulatory technology solutions to be developed by the private sector. Additionally, if market participants’ data sets were made available (in a similar vein to the synthetic data sets provided to participants in the regulator’s Digital Sandbox), then this could unlock further innovative solutions. There are already fantastic use cases that leverage available data; one of our members, for example, has been working with partners to model and categorise transactional data (e.g. carbon numbers associated with ISIN numbers), which has revealed valuable insights about the broader value chain. Lastly, while outside the ambit of this Discussion Paper, our members consider that creating an ‘open data’ framework i.e. broadening the data available to consumers and other market participants, beyond traditional financial disclosures, such as data from the retail sector and other industries, would provide a more holistic overview of all actors’ carbon footprints and accelerate transition to a Net Zero economy.
- Adopt more technology-led ways in which to monitor compliance with the new sustainability disclosure and investment labels requirements. TechSprints on model driven, machine readable and executable regulatory reporting have proven that the regulator and regulated firms can build a workable model where real-time updates can be shared by firms. Technology-driven supervision could offer a real-time, or near real-time, way in which to determine the efficacy of the new regime. We note the Digital Sandbox is also exploring the use of digital ledger technology in the context of assurance for market participants’ ESG data. We would also encourage the regulator to explore the extent to which embedded supervision [a framework that allows compliance with regulatory requirements to be automatically monitored by reading the ledger, reducing the need for firms to actively collect, verify and deliver data] can be deployed. The FCA should assess lessons learned from the current ESG Digital Sandbox in developing the proposals.
- Support and incentivise firms’ automation of climate-related regulatory reporting. We invite the FCA to support and incentivise firms to switch from manual reporting (via spreadsheet) towards more innovation-led solutions for climate-related reporting, whether developed in-house or by third party providers. The underlying aim should be to drive the production of high quality data sets, which is central to assurance and the development of new, innovative products, while ensuring reporting is not overly burdensome to firms. Our members consider that data from all market participants - be they small, medium or large firms - is essential in order to drive impactful change. To that end, the FCA’s approach to incentivising the move to innovation-led reporting needs to provide sufficient lead time to small and mid-size firms, enabling them to prepare and invest in reporting-related solutions.
Design principles for consumer-facing disclosures
The design principles underpinning consumer-facing disclosure documents are critical in ensuring the documents aid consumers’ understanding of the features of retail investment products and can contribute to better informed financial decision making. Innovate Finance would encourage both the FCA and the newly created Disclosures and Labels Advisory Group (“DLAG”) to:
- Consider the lessons to be learned from the design of other disclosure documents: for example, the EU’s PRIIPs Regulation (Regulation (EU) No 1286/2014) introduced key information documents (“KID”) for retail investors, but a 2020 review found that consumers struggled to correctly answer “understandability” questions based on the KID. We note that the FCA recognises the complexity of the KID, and this is included in the UK’s PRIIPs review work programme.
- Actively focus on and embed accessibility and inclusivity in the design process. It will be necessary to test that disclosures for retail investors are readily understood and accessible for all - we welcome the FCA’s commitment to engage with consumers to explore elements of the consumer-facing disclosures. A number of our members have deep expertise in the design of accessible and inclusive products and services; if the FCA and/or DLAG would find it helpful to leverage this knowledge, Innovate Finance would be happy to facilitate discussions with our members.
- Ensure consumer-facing disclosures are fit for the modern age. Whilst we are mindful of issues around digital exclusion, the design principles should reflect that a growing majority of retail consumers engage with financial services through digital channels, so centring the design on an analogue approach to disclosures would be inappropriate. This consideration coupled with the FCA’s behavioural design expertise should be used to inform the format, length, etc of the disclosure documents.