Written by Paul Gair, partner, James Matthews, managing associate, and Claire Kershaw, knowledge lawyer, in the financial disputes and investigations team at TLT
Ahead of the FCA’s anti-greenwashing rule and related finalised non-handbook guidance coming into force on 31 May 2024, experts at national law firm TLT outline and discuss some of the key implications of one of the most notable financial regulatory developments this year.
Background
The rule and guidance form part of a package of measures being introduced by the FCA through the Sustainability Disclosure Requirements and investment labels regime, to help consumers navigate the market for sustainable investment products.
The SDR regime is widely seen as the UK’s answer to the EU Sustainable Finance Disclosure Regulation, which is currently under consultation and review by the European Commission. Under the regime firms can also start to use investment labels from 31 July 2024, and asset managers who are not using labels but who use sustainability-related terms in their naming and marketing must comply with additional naming and marketing rules and produce certain disclosures from 2 December 2024. The rule is perhaps the most significant, not to mention most high-profile, aspect of that regime, applying as it does to all FCA-authorised firms. The FCA published the guidance and confirmed the ‘go-live’ date of 31 May 2024 in an announcement on 23 April 2024, following a consultation on draft guidance published in November 2023.
A number of industry responses to the consultation highlighted areas of ambiguity in the draft guidance, leaving firms concerned about regulatory and/or litigation risk arising, and seeking clarification from the FCA.
While the final guidance has gone some way to addressing those, in its feedback statement the FCA has emphasised that it has kept the final guidance principles-based (with a view to it being applied across different sectors). This leaves not insignificant scope for interpretation for firms to navigate.
The scope of the rule (and guidance) As a reminder, the rule provides that a firm must ensure that any reference to the sustainability characteristics of a product or service is: · consistent with the sustainability characteristics of the product or service; and
· fair, clear and not misleading. The rule applies when a firm (whether it is undertaking sustainability in-scope business or not): · communicates with a client in the United Kingdom in relation to a product or service; or
· communicates a financial promotion to, or approves a financial promotion for communication to, a person in the United Kingdom.
The guidance provides (in short) that sustainability references should be:
· Correct and capable of being substantiated;
· Clear and presented in a way that can be understood;
· Complete – they should not omit or hide important information and should consider the full life cycle of the product or service providing a representative picture; and
· Comparisons to other products or services are fair and meaningful.
Importantly, the rule does not apply directly to sustainability-related claims a firm may make about itself, as opposed to its products or services. However, any such firm-level claims are caught by other rules and may also be considered part of the ‘representative picture’ (referenced in the ‘Complete’ requirement) in a decision-making process about a product or service offered by that firm.
The FCA’s new approach?
The FCA has emphasised that, for most firms, the rule does not introduce a new requirement as they should already be:
· ensuring their claims are fair, clear and not misleading under existing FCA rules and requirements2; and
· compliant with related guidance by the Competition and Markets Authority and Advertising Standards Authority to similar effect.
However, the fact remains that the FCA considers it appropriate to introduce the rule, in addition to the existing rules and requirements in this space. The rule provides a new, more focussed, framework for supervision and enforcement in relation to sustainability claims, and the FCA has signalled an intention to use its powers to manage non-compliant firms. As the FCA indicated in its ‘Introduction’ to the final guidance:
“It gives us an explicit rule on which to challenge firms if we consider they are making misleading sustainability-related claims about their products or services and, if appropriate, take further action”.
It appears the FCA’s policy considerations here include a desire not only to be seen to be clamping down on greenwashing by firms but to augment its capabilities to do so (by virtue of the breadth and scope of the rule). Firms are therefore unlikely to take much comfort from any suggestion that the potential impact of the rule and guidance could be downplayed in practice, when they come into force at the end of this month.
In response to questions raised in the consultation, the FCA also states in the final guidance that:
“We will take our usual supervisory and enforcement approaches. We may take supervisory or enforcement action where we have reason to believe that there is risk of consumer harm or where serious misconduct may have taken place”.
Therefore, despite the assurance of a ‘BAU’ approach, given the level of public interest in sustainable products and widespread concerns about greenwashing more generally, we anticipate the FCA will be keen to be seen as taking proactive and robust steps to enforce the rule.
Potential litigation risk
In a similar vein, the introduction of the rule also significantly raises the profile of the FCA’s expectations of firms in this regard to the public, in particular all potential ‘audiences’ to whom firms may make sustainability-related claims. These include existing and prospective clients, customers, consumers or businesses.
At a very high level, a breach of the rule, as any other FCA rule, will be actionable by a ‘private person’ who suffers loss as a result of such breach, pursuant to s.138D of the Financial Services and Markets Act 2000.
Outside of the cause of action afforded by s.138D to ‘private persons’, firms may (also) find themselves in receipt of allegations of misrepresentation from other firms and organisations in relation to sustainability claims. While breach of the rule itself may not directly give rise to such misrepresentation claims, which are likely to be harder to prove in terms of establishing a firm’s liability (and loss will potentially be difficult to prove in either scenario), we anticipate analogies with respect to alleged breaches of the rule will be drawn by prospective claimants when formulating claims.
There is also the question of what other ‘follow-on’ litigation may arise as a consequence of potential enforcement of the rule by the FCA.
Practical steps to mitigate risk
Regulatory and litigation risk can never be excluded entirely, but – to the extent they have not already done so – firms can take steps now to ensure they are mitigating such risks, while still investing in and promoting their green/sustainable products and services:
· Undertake a review of the firm’s compliance framework to ensure that adequate policies and procedures are in place to capture the requirements of the rule including the points set out below.
· Capture and review of all current sustainability references (including associated use of logos and colours etc) against the final guidance, noting the examples of poor and good practice. Unless/until greater clarity emerges, it would be prudent to take a cautious approach to the question of what documents might be said to contain sustainability references (however brief/generic they may seem).
· Remaining cognisant that claims a firm makes about itself may be considered part of the ‘representative picture’ of a product or service. This will likely require a particularly delicate balancing act by firms already concerned about the greenwashing risk associated with supporting high emitting companies that are also offering products or services with sustainability characteristics.
· Careful assessment and testing of the evidence upon which current sustainability claims are based, in particular where supplied by third parties.
· Considering and implementing regular reviews of all relevant claims; firms will have to take a view on the appropriate frequency but relevant factors will include its normal best practice, the life-cycle of the product/service, key milestones and/or any potential trigger events within that.
· Implementing systems and controls to ensure new sustainability claims are similarly captured and reviewed going forwards.
· Training for all relevant staff (including but not limited to product development, sales, marketing and PR teams), potentially including refresher training on existing requirements and how they interact with the rule, and – where relevant – on the SDR and labelling regime, and naming and marketing rules due to come in later this year.
· Monitoring updates to relevant guidance from the FCA (and CMA and/or ASA where applicable), enforcement findings, and – at a higher level – developments in market thinking on sustainability, and implement changes to reflect them where appropriate.
It will be interesting to see to the extent to which the concerns around regulatory and litigation risk manifest over the coming months, and whether the FCA issues any updates to the guidance. As noted above, firms should monitor the position closely and be prepared to respond to key developments as they arise.
