By Victoria McCarron

On 30 January 2023, the Treasury Sub-Committee on Financial Services Regulations published a letter from Nikhil Rathi (CEO of the FCA). This letter is a response to the sub-committee’s questions about the FCA’s October 2022 consultation paper on sustainability disclosure requirements (SDR) and investment labels (CP22/20). The letter from the sub-committee’s chair, Harriet Baldwin, that Mr Rathi was responding to was published alongside this.

The main content of the letter was as follows:

• The FCA expressed how it intended to monitor and enforce the rules around SDR, noting that these proposals were aligned with the new Consumer Duty requirements. It would take enforcement action if they saw poor behaviour that could lead to consumer harm, or detriment to their interests. It was taking steps to develop its expertise relating to ESG, having recruited an ESG Director in 2021 and was providing training for colleagues. The FCA had a specific ESG strategy to ensure consideration of greenwashing and other ESG-related risks were accounted for, whilst their regulatory tools were utilised effectively.
• The FCA laid out how it sought to introduce sustainability disclosures and investment labels whilst balancing this with consumer choice. The labels would not reduce consumer choice but would rather help investors differentiate between products that aim to deliver a positive, sustainable outcome and those that do not.
• The FCA did not anticipate market distortions to occur as a result of their proposed measures. Their labels were proposed to enable consumers to choose products that aligned with their ESG preferences that, long-term, may lead to an increase in the availability of sustainable investment products. They did not foresee a decline in sustainable investing following the introduction of their rules, emphasising that many market participants seek guardrails in this space.
• There was clarification over the consultation paper issued by the FCA in October 2022; the FCA recognised that a number of products would not meet the qualifying criteria for the use of a sustainability label and therefore may either be adapted, or the product would be changed. Should a firm make changes to their products, they would need to notify existing consumers of any significant changes. The FCA believed that firms have sufficient time to consider their products against the new criteria and make any necessary changes, given most of its requirements would not come into force until 30 June 2024.
• The FCA stated that they sought to ground these new measures in existing rules and expectations to keep costs to firms to a minimum. In this way, this would avoid an increase in fees charged by firms and distributors. For example, the qualifying criteria for the proposed sustainable investment funds build on the existing Guiding Principles, whilst the detailed product / entity level sustainability disclosures broadly built from existing Task Force on Climate-Related Disclosures product and entity reports. An important aspect of their proposals entailed alignment with the new Consumer Duty. Therefore they did not foresee material additional costs to firms.
• The FCA provided further explanation as to its specific ‘anti-greenwashing’ rule as a proposed addition to the ESG Sourcebook. It expressed that this was a necessary proposal, intended to link the ‘clear, fair and not misleading’ principle directly to sustainability claims. In this way, all firms would understand this applied when making sustainability claims about their products and services. Having this as an explicit rule would allow them to challenge any firm contravening these greenwashing rules and subsequently take enforcement action.
• The FCA added that whilst the proposals in CP/20 focused on UK fund products and portfolio management, it wants retail investors to be able to trust all products offered in its market. Therefore, it would welcome additional powers to apply their proposed labelling and disclosure rules to overseas products, thus extending their current remit. The FCA was currently working with HM Treasury on this point and would revert on this.
• The FCA recognised the current disclosure requirements in both the EU and US, stating that its proposals were intended to remain compatible with these. However, it also recognised that concerns have been raised about lack of clarity over both of these regimes, noting it would not be appropriate or consistent with its objectives to simply replicate other jurisdictions’ regulations. It noted that its starting point also differed from these regimes; its proposals aim to categorise products with consumers' trust and information needs as its primary concern, whereas both the EU and US regimes aim to categorise products so as to determine which disclosure requirements should apply. The FCA’s aim was to be compatible and complementary with other jurisdictions, whilst remaining firm on its own objectives.
• The FCA also noted that their proposals would not affect UK investors’ ability to invest in funds managed outside of the UK. Its core intention was to promote the UK as a trusted centre for sustainable investment. However, it noted that it is, however, seeing other regulators moving towards tackling greenwashing and providing greater clarity on sustainability features of funds based in other jurisdictions, such as ESMA's recent consultation on fund names using ESG or sustainability-related terms.

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