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  • FCA Anti-Greenwashing Rule – consultation responses highlight industry’s concern to mitigate litigation risk

The FCA’s new anti-greenwashing rule (the AGR) is due to come into force on 31 May 2024. Our previous article outlined the proposed scope of the AGR and the draft guidance at a high level. As the FCA publishes its final guidance today, in this follow-up article we highlight a few key themes coming through from some of the industry responses to the FCA’s consultation on its draft guidance, which closed in January 2024.

It is noteworthy, although perhaps unsurprising, that a number of the responses highlighted concerns around litigation risk arising from the AGR and pressed the FCA for more detailed guidance and/or clarity in certain areas. As we review the final guidance just published, it will be interesting to see the extent to which the FCA has factored consultation responses into this.

While noting the s.138D FSMA limitations on who can bring a claim for a breach of the AGR, with claims about the sustainability of products increasingly driving purchasing decisions by customers, it is essential for the confidence of both firms developing sustainability-linked products and the relevant market participants purchasing them, that the guidance provides clarity to ensure litigation risk is mitigated as far - and as early - as possible.

The Loan Market Association (LMA) and International Swaps and Derivatives Association (ISDA) responses stress the need for international coherence and interoperability of similar and related rules, warning that the volume of consultations, guidance and regulation in the greenwashing space both in the EU and globally has made it very difficult for firms to understand and implement all applicable requirements. They have encouraged the FCA to take this opportunity to address the risk of inconsistency at a global level by clarifying terminology and referencing existing regulatory frameworks in the proposed guidance.

The UK Sustainable Investment and Finance Association (UKSIF) (and indeed the LMA and ISDA responses) also emphasise the need for coherence at the domestic level.

ISDA suggests that the FCA should be mindful of the need for key technical terms to be consistently defined across existing guidance issued by the Competition and Markets Authority (CMA) and Advertising Standards Authority (ASA) (paragraph 10 of the draft guidance states, at a high level, that the AGR is consistent with CMA guidance and the applicable ASA codes).

The LMA has encouraged the FCA to provide further clarity around the scope of the AGR and how it interacts with the FCA’s own existing rules on communications and financial promotions.

The ISDA response also notes that the draft guidance is heavily retail-focussed and that it would be helpful for its members for future guidance to include a wholesale focus, where firms are entitled to assume a different level of understanding of both ESG issues and products generally.

Interestingly, the UKSIF response suggests thought be given to how to highlight to firms that even where they implement the guidance, it may not afford them with complete protection against being “held liable for misleading claims made to retail investors in regards to a fund with sustainability characteristics”.

The draft guidance states that firms should ensure their sustainability related claims are “complete – they should not omit or hide important information and should consider the full life cycle of the product or service.” There appear, understandably, to be concerns around precisely what constitutes “important” information in this context and what scope there is for any ‘gaps’ in relevant communications to be exploited by potential claimant law firms and claims management companies, seeking to litigate on the AGR.

UKSIF propose replacing the term “complete” with “fully representative”, providing an example of where new circumstances may arise in the life cycle of a product but which the firm has not had the opportunity to review and amend the sustainability claims as appropriate. Relatedly, ISDA ask the FCA to clarify whether relevant financial promotion need to be more regularly amended on an ongoing basis through the product life cycle, or if it is sufficient for firms to follow their normal practices (e.g. annual review).

ISDA also request more guidance on the level of detail required to ensure compliance with the “Complete” requirement and ask whether it would include information about the product/service provider, as well as the product/service itself, which would of course increase the burden on firms.

The LMA notes that greenwashing is often unintentional and that firms are heavily reliant on the information and tools available to market participants at the time of making a sustainability claim, whereas best practices for selection of metrics, data and analytics generally will evolve over time. It encourages the FCA to go further and use the guidance to inform market participants about the various tools, resources and information which can be used to ensure compliance, and to provide further detail in respect of the processes and controls that can be implemented to support claims made.

In a similar vein, ISDA ask the FCA to clarify what it considers would constitute “reasonable steps” to substantiate sustainability claims, particularly where firms are reliant on third parties to do so, and whether there should be some form of ‘safe harbour’ for firms relying on such third parties (for example voluntary carbon credit projects from reputable programmes).

UKSIF has encouraged the FCA to provide greater clarity on what constitutes a “communication”, beyond the types identified in the consultation. In particular, UKSIF query whether firm-level documents such as annual accounts, which include incidental references to specific products and services, would fall within scope (in whole or in part), noting existing (and widely accepted and understood) definitions of communications within the FCA Handbook.

This is echoed by both the LMA and ISDA responses. The former requests further clarification in relation to what constitutes ‘limitations, disclaimers and qualifications’, and the distinction between financial promotions and non-marketing communications. ISDA requests greater clarity around what constitutes a “claim” and the role of the Terms & Conditions underlying a product in informing such ‘claims’.

Finally, the UKSIF response emphasises that sustainability is a rapidly evolving field and that climate goals can quickly become outdated, and suggests that the FCA provides both further guidance and examples of how firms should be explicit about the extent of their climate actions steps and their value within that context.

We are reviewing the final guidance to see the extent to which suggestions from UKSIF, ISDA, the LMA and other market participants have been incorporated by the FCA and will publish our further thoughts on the final guidance and the implications for firms shortly.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Date published

23 April 2024

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