As we celebrate World Earth Day, Jessica Reed, Partner, and Edward Twigger, Associate at Farrer & Co LLP, look ahead and into some of the detail behind the FCA’s new ‘anti-greenwashing rule’ coming into force next month
With sustainability becoming a key priority across the financial services sector, the Financial Conduct Authority (the FCA) has become increasingly concerned that some financial services firms are making misleading sustainability-related claims. Tackling ‘greenwashing’ has consequently become high on the regulatory agenda.
To address this issue, the FCA is introducing a new ‘anti-greenwashing rule’, which will come into force on 31 May, as part of a broader package of ESG measures currently being implemented by the FCA. Under the Sustainability Disclosure Requirements (SDR), independent financial advisors (IFAs) will have additional obligations to pass on consumer-facing disclosures and sustainability labelling information to their clients.
This new rule intends to allow consumers to make informed decisions that are aligned with their sustainability preferences, and to create a ‘level playing field’ for firms which make genuine claims about their products’ sustainability characteristics.
The anti-greenwashing rule is consistent with the FCA’s broader drive to improve the clarity and accuracy of firms’ marketing, and it dovetails with the FCA’s Consumer Duty, which places an obligation on regulated firms to act in good faith towards consumers.
UK firms are also subject to separate rules on greenwashing from the Advertising Standards Authority (the ASA) and the Consumer and Markets Authority, who have both published guidance relating to sustainability claims, and these regulatory bodies also have powers to take action against financial services firms. Previous examples have demonstrated this, such as in 2022 when the ASA banned two HSBC adverts over what it alleged were misleading claims in relation to HSBC’s climate change credentials.
Which firms does the anti-greenwashing rule apply to, and what does it require?
The anti-greenwashing rule applies to all FCA regulated firms, including financial advisers and wealth managers. These firms must ensure that any references they make to sustainability characteristics are consistent with the sustainability characteristics of the product or service and are clear, fair, and not misleading.
The term “Sustainability characteristics” will relate to the environmental and/or social aspects of financial products and services.
From 31 May, the FCA expects any sustainability references in communications to be:
· Correct and capable of being substantiated.
· Clear and presented in a way that can be understood.
· Complete – communications should not omit key information and should take into account the product/service life-cycle.
· Fair and meaningful in relation to any comparisons.
The scope of the rule is not limited to retail business. Therefore, products and services that are marketed only to professionals are also caught by the requirements.
What guidance is available to help firms comply with the new rule?
The FCA has published draft guidance (GC23/3) to help firms to understand the FCA’s expectations under the anti-greenwashing rule.
Financial advisers will need to take care when comparing the sustainability characteristics of financial products for their clients and must ensure that the comparisons they make are “fair and meaningful”. Any comparisons should make clear what is being compared, how a comparison is being made and should compare like with like.
Moreover, wealth managers, planners and financial advisers must also ensure that, when engaging with clients, the sustainability-related claims they make are clear, transparent and straightforward, and that they are capable of being understood by the intended audience. Therefore, the FCA would expect such firms to explain clearly any technical language to clients.
In addition to this, the FCA has also emphasised that, when making a visual presentation of a sustainability-related claim (for instance, on a website), firms will need to take special care to ensure that images, logos and colours do not suggest that products or services have sustainability characteristics which they do not actually have.
What should firms be doing now?
Ahead of the incoming rule, UK authorised firms must review their existing customer communications to establish whether they are making sustainability-related claims. Firms should then take a look at how any sustainability-related claims may withstand scrutiny under the new regime, and how these can be adapted to comply with the new rule.
Linked to this, It is important for firms to review and strengthen their internal review processes for communications to cater to the anti-greenwashing rule. These processes should allow firms to review (and if necessary, amend) their sustainability-related claims regularly, as the underlying evidence could change. To ensure compliance is maintained across the businesses, training should also be provided to front-office staff to ensure that communications with clients do not inadvertently breach the anti-greenwashing rule.
Once the anti-greenwashing rule is in force, we expect the FCA to monitor for signs of greenwashing from a range of sources. The FCA will also monitor client complaints, intelligence gathered on the quality of firms’ regulatory applications, and broader supervisory intelligence. Ensuring watertight policies and practices are in place now will put financial services firms in the best possible position ahead of the incoming rule.
