In late October the FCA launched a consultation on CP22/20 a range of new rules that will enhance its regulatory toolkit for dealing with ESG issues.
The proposed new anti-greenwashing rule which will apply to all financial regulated firms from 30 June 2023 will give the FCA an explicit regulatory hook on which to hang potential supervisory or enforcement action for firms engaging in greenwashing. There are also new rules proposed relating to sustainability disclosure requirements, consumer facing disclosures and investment labels that are likely to be implemented for portfolio managers, UCITS managers and AIFMs using a staged approach from 30 June 2024 and which will increase the compliance burden on – and regulatory risk for – firms operating in these sectors.
Although CP22/20 will enhance the FCA’s ability to act that does not mean the FCA is currently powerless to tackle ESG issues. The existing regulatory and statutory framework already provides the FCA with a broad range of powers that could be applied to greenwashing or wider ESG issues (including governance, and diversity and inclusion).
For example, Principle 7 of the Principles for Businesses, which requires authorised firms to pay due regard to the information needs of clients, could be used to sanction firms for producing misleading advertising about the green or sustainable credentials of particular investments or products.
Principle 3, which places a high-level obligation on regulated firms to “take reasonable care to organise and control their affairs reasonably and effectively” could potentially apply against firms which lack effective management oversight of climate related disclosures or which have inadequate resource, systems or controls in place to monitor – for example – diversity and inclusion.
There is also the possibility of a criminal prosecution or other regulatory investigation for greenwashing. Section 89 of the Financial Services Act 2012 created a criminal offence for knowingly making a false or misleading statement, which could include mislabelling financial products as “green” or “sustainable”, whilst the various offences under Fraud Act 2006 are sufficiently broadly drafted to encompass a range of ESG related acts and omissions.
Whilst a criminal process may take a long time to come to fruition, the FCA also has real time powers to intervene. This includes the power to unilaterally remove a firm’s regulatory permissions, a broad general power to impose requirements on firms and also a power to ban misleading financial promotions. Such interventions can result in serious costs and disruption to firms and their customers, as well as adverse publicity and in recent years the FCA has been far more willing than ever to deploy such powers when it considers there to be unacceptable levels of risk to consumers or markets.
We know that the advertising watchdog, the ASA, recently banned a series of misleading adverts by a major financial institution for its environmental claims which was seen as a bold intervention to make companies think twice about greenwashing. Given its increasingly assertive supervisory approach under Nikhil Rathi, there is no reason to think the FCA will wait for new rules to come into force before it seeks to intervene or take enforcement action against similar issues of disclosure or false environmental claims in the UK marketplace.
Indeed we know the FCA advertised in August for experts to join a new ESG committee expected to be up and running during Q4 2022 with a remit to consider how to advance and achieve the regulator’s commitment to supporting the UK Government’s net zero ambitions. The Committee’s role will be to advise the Board on how the FCA should develop its ESG strategy in line with the organisation’s statutory objectives and regulatory principles.
The writing is on the wall therefore for regulated firms to be aware ESG will be an increasing priority for the FCA. They should expect greater scrutiny of ESG disclosures and should be embedding ESG compliance throughout their operations now or potentially face serious consequences.
