During an evidence session by the Treasury Committee's Financial Services Regulations sub-committee, it emerged that the FCA, the financial services regulator, had not looked into any costs linked to mis-sold funds that were labelled as sustainable.
This led the sub-committee's chair, Tory MP Harriet Baldwin (above), to say she was in a state of 'shock.'
Grilling Sacha Sadan, the FCA's director of ESG, as well as Mark Manning, the watchdog's specialist for sustainable finance and stewardship, Baldwin asked if the regulator had studied potential costs to ordinary Brits if they opted out of funds that lacked sustainable standards and credentials.
"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," Baldwin said.
Firing questions at Manning, she asked: "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: "Eh, we have not got a figure for that. It is quite a theoretical exercise at this stage."
"I think this has been an eye-opening session. I do express shock that you had not thought about the cost."
Pressed on the issue, Manning did acknowledge costs were "not going to be zero".
However, he did stress many retail investors "would be quite happy" investing in funds that are "considering sustainability factors, but [are] not actively pursuing a sustainable objective."
Having none of it, Baldwin fired back: "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?"
It was ESG head Sadan who stepped in and replied: "We are raising the bar to make sure [investors] get what they need."
Baldwin, however, said: "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".
Her statement was followed by a question from Labour MP Rushanara Ali, who wanted to know whether such costs could be compensated via reimbursements."
"Should the companies that have basically lied to people be bearing some of those transaction costs?"
"We are raising the bar to make sure investors get what they need."
Ali's statement met approval from follow sub-committee member Andrea Leadsom, the former Tory Business Secretary, who 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 replied: "Not because of these rules, but if it was not fair or misleading, then we still have the powers to be doing that anyway."
Baldwin closed the hearing by saying: "I think this has been an eye-opening session for the committee. We have certainly learned a lot."
She added: "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."
The Treasury Committee’s report on ‘Net Zero and the Future of Green Finance’, published in April 2021, recommended that the “FCA should consult on the merits of making climate or carbon labels for consumer financial products mandatory, as a means to encourage innovation. The FCA should consult on how best to make such labels readily and widely understood.”
