On April 23, 2024, the FCA released two important publications related to its Sustainability Disclosure Requirements (SDR) and investment labelling regime.
- The first publication is the FCA’s finalized guidance (FG 24/3) on the anti-greenwashing rule, which will come into force on May 31, 2024. This rule aims to protect consumers from greenwashing and create a level playing field for firms offering products and services with genuine sustainable characteristics.
- The second document, a consultation paper (CP 24/8), proposes expanding these requirements to encompass all portfolio management services, initially targeting asset management firms, and potentially extending to wealth management and retail investor services.
The anti-greenwashing rule, referenced in section 4.3.1R of the FCA’s ESG sourcebook, aims to shield consumers from misleading claims and ensure fair competition among firms that genuinely integrate sustainable practices.
According to the latest Financial Lives survey, there is a substantial consumer interest in sustainable finance. The survey revealed that 81% of the adult respondents expressed a preference for their investments to not only provide financial returns but also contribute positively to society.
The initiative not only seeks to align business practices with consumer expectations but also aims to enhance the transparency and integrity of sustainability-focused financial products, thereby supporting the sector’s long-term growth and competitiveness.
The anti-greenwashing rule forms part of a comprehensive set of measures that the FCA finalized in November 2023 through their Sustainability Disclosure Requirements (SDR) and investment labels regime (PS23/16). This package of measures aims to promote transparency and accuracy in the marketing and labelling of sustainable finance products.
FG 24/3: FCA’s Finalised Non-Handbook Guidance on The Anti-Greenwashing Rule
The FG 24/3 guidance is designed to assist firms in comprehending and adhering to the anti-greenwashing rule. This rule and the accompanying guidance are intended to complement and align with existing regulations and expectations.
To understand these requirements and what firms must do before the implementation date of 31 May 2024, we asked our AI RIG to give us the summary of these requirements and the control framework for the firms to comply with the new rule.
- Can you provide a summary of this document?
- What is the main purpose or objective of this regulatory document?
- What key changes or new requirements does this document introduce?
- Are there any amendments to existing regulations introduced in this document?
- Who and what type of firms the document is relevant to?
- What are actions the document is asking firms to take?
- What are the key Dates in the document?
- Any additional information firms should pay attention to?
Below are the answers given by our AI RIG for the above questions:
Q1. Can you provide a summary of this document?
The document fg24-3.pdf discusses the importance of transparency and clarity in the claims made by financial firms regarding sustainability characteristics. It emphasizes the need for firms to consider whether the intended audience would understand technical language and suggests explaining any technical terms that may be difficult to comprehend. The document also advises against using broad terms or general statements that could be unclear or misleading. Additionally, it highlights the importance of providing useful information for the intended audience and acknowledges that the presentation of information may vary depending on whether the communication is addressed to a retail client or a professional client.
Q2. What is the main purpose or objective of this regulatory document?
The main purpose or objective of the document fg24-3.pdf is to provide finalised guidance on sustainability-related claims in the financial industry. The document aims to help firms ensure that their sustainability-related claims are accurate and transparent, protecting consumers from potentially misleading information. It also aims to enhance the integrity and credibility of the market for sustainable finance and contribute towards achieving the UK’s net zero emissions target. The document summarizes the feedback received during the consultation process and addresses the main areas of feedback, including requests for more examples and clarity on expectations.
Q3. What key changes or new requirements does this document introduce?
Based on the provided information, the key changes or new requirements introduced by this document include:
- Introduction of guidance on providing transition finance with integrity: The document mentions that the UK financial sector is undertaking wider work to understand the challenges in providing transition finance to support companies in reducing their carbon emissions and meeting net zero targets. The guidance aims to help firms in supporting sustainability objectives by channelling finance to support the transition to net zero.
- Clarity on the use of visuals in sustainability-related claims: The document provides clarity on the use of visuals in Chapter 2. It states that if a firm wishes to use an image in its sustainability-related claims, it should be consistent with the sustainability characteristics of the product or service. However, the guidance does not extend to the use of visuals in a context not intended to refer to or describe the sustainability characteristics of a product or service.
- Implementation date: The document discusses the question of whether the guidance should come into force on May 31, 2024. While most respondents were supportive of this date, some disagreed and suggested alternative dates such as December 2, 2024, or July 31, 2024, to align with other regulations and labelling regimes. Some respondents also asked for an implementation period to allow firms time to review their claims and make any necessary amendments without the risk of enforcement action.
- Request for further guidance and clarification: Respondents asked for further guidance in areas such as stewardship. They also requested clarification on terminology used in the guidance, expectations when firms rely on third parties for data and information, and whether following existing industry standards for sustainability would meet the anti-greenwashing rule. Additionally, respondents asked for an outline of the supervision and enforcement approach and whether the guidance would be periodically updated.
Q4. Are there any amendments to existing regulations introduced in this document?
Based on the information provided in the document, it does not appear that this document introduces any amendments to existing regulations. The document states that the guidance is intended to help firms comply with the anti-greenwashing rule and is consistent with existing expectations, without creating new obligations for firms.
Q5. Who and what type of firms the document is relevant to?
This document, fg24-3.pdf, is relevant to all authorized firms, regardless of whether they are subject to the Consumer Duty. The document provides guidance on how the rule and the Consumer Duty interact for these firms. The term “audience” is used in the document to capture the client or person that the firm may be communicating with, which can include existing or prospective clients, customers, consumers, or businesses. The document also mentions that some authorized firms operate a business-to-business model, as opposed to a customer-to-business model. Therefore, the guidance in this document is applicable to all authorized firms, regardless of their business model or the type of clients they serve.
Q6. What are actions the document is asking firms to take?
The document requires firms to take several actions. Firstly, they are expected to review and understand the guidance provided in the document. This includes considering the examples given and how they apply to their specific business and the claims they make. Firms are also encouraged to consider if other industry guidance or standards can provide more tailored information for their sector.
Additionally, the document emphasizes the importance of avoiding greenwashing, which refers to misleading claims about environmental or social characteristics. Firms are expected to assess the risk of greenwashing associated with supporting high emitting companies that aim to reduce their carbon emissions over time.
Furthermore, the document states that firms should implement the principles outlined in the guidance and apply them to their operations. This includes implementing controls, processes, and policies to ensure compliance with regulations and to mitigate the risk of consumer harm or serious misconduct. Firms should also be prepared for potential supervisory or enforcement action if there is a risk of consumer harm or serious misconduct.
Overall, the document requires firms to actively engage with the guidance, assess their practices, and take appropriate measures to comply with regulations and prevent consumer harm.
Q7. What are the key dates in the document?
The important dates mentioned in the document are:
- 31 May 2024: This is the proposed date for the guidance to come into force, alongside the anti-greenwashing rule.
- 2 December 2024: Some respondents disagreed with the proposed date and suggested this as an alternative date for the guidance to come into force, alongside the naming and marketing rules for asset managers who are not using labels but are using sustainability-related terms in their naming and marketing.
- 31 July 2024: Another alternative date suggested by some respondents for the guidance to come into force, to align with the date that firms can start to use labels under the SDR and labelling regime, and the Consumer Duty requirement for closed products.
Q8. Any additional information firms should pay attention to?
Firms should pay attention to several other factors when creating, implementing, and monitoring controls, processes, and policies in relation to regulatory compliance. Some of these factors include:
- Regulatory requirements: Firms need to stay updated on new, existing, and upcoming regulations that are relevant to their industry. They should thoroughly understand the requirements and ensure that their controls, processes, and policies align with these regulations.
- Industry best practices: Firms should also consider industry best practices when developing their controls, processes, and policies. This involves researching and understanding how other similar financial institutions are addressing regulatory compliance and implementing effective measures.
- Internal policies and procedures: Firms should review and align their internal policies and procedures with the regulatory requirements. This includes ensuring that there are clear guidelines and protocols in place for employees to follow to comply with regulations.
- Risk assessment: Firms should conduct regular risk assessments to identify potential compliance risks and vulnerabilities. This involves evaluating the impact and likelihood of risks and implementing appropriate controls and mitigation strategies to address them.
- Training and education: Firms should provide regular training and education to employees to ensure they are aware of the regulatory requirements and understand their roles and responsibilities in compliance. This can include training on specific regulations, ethical conduct, and reporting procedures.
- Monitoring and testing: Firms should establish monitoring and testing mechanisms to ensure ongoing compliance with regulations. This can involve conducting regular audits, reviews, and assessments to identify any gaps or weaknesses in controls, processes, or policies.
- Reporting and documentation: Firms should maintain accurate and comprehensive records of their compliance efforts. This includes documenting policies, procedures, training records, risk assessments, and any incidents or breaches that occur. It is important to have a robust reporting system in place to promptly report any non-compliance issues to relevant authorities.
- Third-party relationships: Firms should carefully evaluate and monitor their relationships with third-party vendors, suppliers, and service providers. This includes assessing the appropriateness and reliability of the information provided by third parties and ensuring that they also comply with relevant regulations.
Overall, firms should have a proactive and comprehensive approach to regulatory compliance, considering all relevant information and factors to ensure they are meeting their obligations and protecting their clients and stakeholders.
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