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Enforcement risks: UK FCA’s proposed anti-greenwashing rule and Sustainability Disclosure Requirements

The UK's Financial Conduct Authority (the FCA) has proposed new rules to tackle greenwashing, which is a “core regulatory priority” for the FCA. We consider here the key enforcement and litigation risks arising from the recently published consultation paper on Sustainability Disclosure Requirements and investment labels (the Consultation Paper).

The proposed general anti-greenwashing rule and Sustainability Disclosure Requirements

At COP 26 last year, Nikhil Rathi (Chief Executive of the FCA) warned the financial services industry that it was time to “walk the walk”, and emphasised that greenwashing would not be tolerated in the UK financial services industry.

The FCA now proposes a general anti-greenwashing rule requiring all regulated firms (including those that approve financial promotions for unauthorised persons) to ensure that sustainability-related claims, naming and marketing are clear, fair and not misleading, and consistent with the sustainability profile of products.

While many of the FCA’s existing rules (including some of its Principles for Businesses and COBS rules) already apply to firms and could be used to tackle greenwashing, the FCA is putting down a clear marker: for sustainability claims, the general anti-greenwashing rule will be an “explicit rule on which to challenge firms” and take enforcement action. 

The FCA also proposes:

  • a series of sustainable investment product labels;
  • naming and marketing restrictions on certain sustainability-related terms;
  • disclosure requirements, including consumer-facing disclosures and more detailed disclosures; and
  • requirements for market intermediaries, such as distributors, in communicating sustainability-related information along the investment chain.

For further detail on the FCA’s proposals, risks for firms and next steps, please see Allen & Overy’s Bulletin.

Key enforcement risks for firms

When taken together with the requirements of the forthcoming Consumer Duty, it is clear that the FCA will be devoting significant time and attention to examining firms’ practices and taking swift action where firms are not deemed to have taken their responsibilities relating to consumers seriously. In relation to timing, the anti-greenwashing rule is intended to come into effect a year earlier than the other requirements, provisionally from the end of June 2023, as soon as the Policy Statement is published.

Firms should keep in mind that an enforcement investigation relating to ESG issues not only carries the risk of potentially significant sanctions (which, in addition to financial penalties and public censure, could also include the imposition of business restrictions and costly consumer or investor redress exercises), but also risks significant reputational harm and loss of client and market confidence.

The FCA has expressly flagged that it could take enforcement action if a firm fails to comply with a requirement to make required disclosures (ie if it “has ignored” the requirements), makes misleading disclosures, misuses a label, or breaches the FCA’s naming and marketing rules.

In this context, firms should be mindful of key enforcement risks.

  • Failure to make a disclosure: Staying abreast of new disclosure requirements (including for consumer-facing disclosures and the three types of more detailed disclosures) and planning ahead to ensure that policies, procedures and reporting frameworks are in place to accurately make the required disclosures will be important for firms. It will be equally important to maintain open engagement and cooperate more generally with the regulator to discuss any issues and errors. The FCA may be amenable to providing a correction period to a firm if there has been a genuine mistake or justifiable reason for the failure to make a disclosure, but it would be more likely to open an enforcement investigation if the failure is perceived to have a significant effect on consumers, there were repeated failures to make disclosures, the failure was potentially intentional and/or the failure was identified by the firm without timely correction or escalation to the FCA.
  • Disclosing incorrect (or, arguably, poor quality, unclear or misleading) information: Inadvertent inaccuracies are likely to be treated less severely if they are quickly identified and rectified. However, the FCA may be more concerned if the inaccuracy is perceived to have a significant effect on consumers (such as an inaccuracy in a consumer-facing disclosure as discussed above), given the overlap with the Consumer Duty. Further, repeated incorrect disclosures could trigger an investigation into whether these were intentional or a cause for wider concern. Accordingly, firms should ensure that they investigate the root causes and put in place further controls to mitigate the risk of reoccurrence.
  • Misusing a label: Similarly to the approach to disclosures, inadvertent inaccuracies in the use of labels may be treated less severely if they are quickly identified and rectified. However, repeated incorrect labelling could trigger more serious action (including the commencement of an enforcement investigation) in relation to whether these are intentional or a cause for wider concern, including concerns around a firm’s governance arrangements and wider systems and controls. Accordingly, firms should ensure that they create detailed policies and procedures for the labelling of investment products. The same applies for escalating and reporting any inaccuracies, and the need to investigate the root causes of any inaccuracies in order to put in place further controls, thereby aiming to reduce the risk of reoccurrence.
  • Making intentionally false or misleading disclosures or deliberately misusing a label: A firm is likely to face a much higher risk of FCA enforcement investigation and action if it is suspected of deliberately, recklessly or repeatedly making inaccurate or misleading disclosures, and/or inaccurately or misleadingly labelling its products. When considering which matters to initially refer to its Enforcement Division for investigation, the FCA is likely to select particularly poor examples of compliance or conduct, meaning that firms falling within this category are likely to be some of the first to be investigated and have action taken against them in the coming years.
  • Breaching other naming and marketing restrictions: It seems likely that the FCA will commence enforcement investigations on the basis of the general anti-greenwashing rule (once it has come into force), and its pre-existing requirements relating to firms’ systems and controls. However, there is also a specific proposal for firms providing in-scope products to retail investors that do not qualify for the sustainable labels to not use sustainability-related terms (eg “ESG”, “climate”, “impact”, “sustainable” or “sustainability”, “responsible”, “green”, “SDG”, “Paris-aligned” or “net zero”) in their product names and marketing, and for “Sustainable Focus” or “Sustainable Improvers” products to not use the term “impact”. Firms that misuse these labels can expect to receive at least some supervisory attention from the FCA, with enforcement investigations and action being reserved for firms that are identified as having repeated or deliberate serious issues in this area.

Further reading

For further detail on the FCA’s proposals, risks for firms and next steps, please see Allen & Overy’s Bulletin.

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