Enforcement and litigation risks: UK FCA’s proposed anti-greenwashing rule and sustainability disclosure requirements | Allen & Overy LLP | Daily News Byte

The UK’s Financial Conduct Authority (the FCA) proposed new rules to tackle greenwashing, a “core regulatory priority” for the FCA. We are here to discuss sustainability disclosure requirements and investment labels (the Consultation Paper).

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 the time had come to “to walk”, and stressed that greenwashing will not be tolerated in the UK financial services industry.

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

While many of the FCA’s existing rules (including some of its Principles for Business and COBS rules) already apply to companies and can be used to combat greenwashing, the FCA lays down a clear marker: for sustainability claims, there will be a general anti-greenwashing rule. “A clear rule on which companies can be challenged” and take enforcement action.

The FCA also proposes:

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

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

Key implementation risks for companies

When taken with the upcoming consumer duty requirements, it is clear that the FCA will devote considerable time and attention to investigating the practices of firms and taking swift action where firms are not deemed to have taken their responsibilities to consumers seriously. In terms of timing, the anti-greenwashing rule is intended to come into force provisionally from the end of June 2023, one year earlier than the other requirements, as soon as the policy statement is published.

Companies should bear in mind that enforcement investigations related to ESG issues not only risk potentially significant sanctions (which may include business sanctions and costly consumer or investor redress exercises, in addition to financial penalties and public censure), but also significant reputational damage and loss of client and market trust. Also carries risk.

The FCA has clearly flagged that it can take enforcement action if a firm fails to comply with the requirement to make mandatory disclosures (ie if it “Ignored” requirements), make misleading advertising, misuse labels or breach the FCA’s naming and marketing rules.

In this context, companies should be aware of key implementation risks.

• Failure to advertise: It will be important for companies to stay abreast of the new advertising requirements (including the three types of consumer-facing and more detailed ads) and plan ahead to ensure policies, procedures and reporting frameworks are in place to accurately make the required disclosures. It will be equally important to maintain open engagement to discuss any issues and errors and to cooperate more generally with the regulator. The FCA may be able to provide a firm with a correction period if there is genuine error or reasonable cause for the failure to disclose, but it will be more likely to open an enforcement investigation if there is a perceived failure. Significant impact on customers, repeated failures to disclose, failures potentially willful and/or failures identified by the firm without timely rectification or escalation to the FCA.
• Disclosing false (or, arguably, poor quality, unclear or misleading) information: Inadvertent inaccuracies are likely to be treated less severely if they are identified and corrected quickly. However, the FCA may be more concerned if the inaccuracy is deemed to have a significant impact on the consumer (such as inaccuracies in consumer-materials advertising as discussed above), given the overlap with the consumer duty. Additionally, repeated false disclosures may trigger an investigation into whether this was intentional or a cause for widespread concern. Accordingly, companies should ensure that they investigate the root causes and put more controls in place to reduce the risk of reoccurrence.
• Misuse of labels: Similarly, as with the approach to advertising, inadvertent inaccuracies in the use of labels are treated less seriously if they are quickly identified and corrected. However, repeated mislabeling may trigger more serious action (including the initiation of an enforcement investigation) whether it is intentional or causes wider concern, including concern about the firm’s governance arrangements and broader systems and controls. Accordingly, companies should ensure that they create detailed policies and procedures for labeling investment products. The same applies to raising and reporting any inaccuracies, and the need to investigate the root causes of any inaccuracies in order to establish further controls, which aim to reduce the risk of reoccurrence.
• Willfully making false or misleading advertisements or willfully misusing labels: A firm may face an increased risk of FCA enforcement investigation and prosecution if it is suspected of deliberately, recklessly or repeatedly making inaccurate or misleading advertisements and/or inaccurately or misleadingly labeling 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 into this category are likely to be investigated and action taken. against them in the coming years.
• Violating other naming and marketing restrictions: It seems likely that the FCA will launch enforcement investigations based on the general anti-greenwashing rule (once it comes into force) and its pre-existing requirements regarding 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 sustainability label to not use sustainability-related terms (e.g. “ESG”, “climate”, “impact”, “sustainable ” or “sustainability”, “responsible”, “green”, “SDG”, “Paris-aligned” or “net zero”) in their product names and marketing, and not to use “Sustainable Focus” or “Sustainable Improvers” products. The term “effect”. Firms that abuse these labels can expect to receive at least some supervisory attention from the FCA, with enforcement investigations and prosecutions reserved for firms that are identified as having repeated or willful serious issues in this area.