FCA Consultation Paper CP22/20 here

Here we set out what the proposed rules are and what they will mean for firms.

1. The proposed rules

The proposed rules espouse the broader objectives of market integrity, fair competition and consumer protection through the lens of sustainability.  The core elements of the regime – labelling and classification, disclosure and naming and marketing rules – will initially only apply to asset managers. The rules require these firms to provide easily accessible product-level information to consumers, more detailed disclosures for wider distribution, and information on how sustainability related risks and opportunities are managed to ensure access to standardised sustainability data across the investment chain.

Furthermore, the rules propose labelling and disclosure requirements to help enable informed decision-making. With naming and marketing rules established, the FCA expects firms to ensure sustainability claims are proportionate and not exaggerated for consumers to effectively navigate the market and make informed decisions.

Finally, the FCA proposes a ‘anti-greenwashing’ rule to protect consumers. This will apply to all regulated firms and reiterates existing rules to clarify that sustainability-related claims must be clear, fair and not misleading.

In recognition of the fact that many firms and products operate internationally, the FCA has sought, as far as possible, to achieve international coherence with other regimes – notably the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the US’ proposals by the Securities and Exchange Commission (SEC).

However, there are some differences in approach - particularly with the SFDR which is predominantly a disclosure regime and prescriptive. The FCA-proposed rules, however, have a wider reach and seem more evolutionary.

2. So what does this mean for firms?

The FCA intends to publish the rules by July, with the anti-greenwashing rule becoming effective immediately upon publication.  Firms will need to start considering the implications to operating models. We see three primary challenges.

Consideration for the wider context

Firms will need to consider Sustainability disclosure requirements keeping the wider context in mind and how some SDR requirements tie in other objectives. For example, to be able to deliver good consumer outcomes under the new Consumer Duty rules firms will need to consider how they test, monitor, and adapt sustainability labelling, marketing, communications and disclosures to enhance consumer understanding.

Market-led template for disclosure reporting

The FCA have introduced some prescription around the format and content of the disclosures without providing a template. Firms, therefore, will need to collectively develop a market-led reporting template espousing the regulator’s behavioural research and the disclosure rules. But this may come at the cost of consistency and standardisation.

Alignment with UK Green Taxonomy

The FCA originally confirmed that the UK Green Taxonomy will be the primary tool to measure the ‘sustainability’ of investments and underpin the labels and was going to be the next step after the SDR.

However, the Edinburgh reforms outlined that the Taxonomy will now be delayed while a new green finance strategy is to be published in early 2023. It is to be seen how this new strategy aligns with the SDR and the forthcoming taxonomy. Firms however should be prepared to incorporate any alignment issues when these do land.

This will not be an easy task. We believe the industry will need to come together to make this work and ensure the initiative provides the right platform going forward.