Two Updates Published by the UK FCA on the Anti-Greenwashing Rule, and the SDR and Labelling Regime

April 24, 2024, Covington Alert

On 23 April 2024, the FCA released two important publications relating to its Sustainability Disclosure Requirements ("SDR") and investment labelling regime:

1. Relevant to all FCA-authorised firms: the FCA's finalised guidance(FG 24/3) on the anti-greenwashing rule, with both the rule and finalised guidance coming into force on 31 May 2024; and

2. Relevant to firms providing portfolio management services:a consultation paper(CP 24/8) setting out the FCA's proposal to extend the SDR and investment labelling regime that will be applicable to asset management firms from 31 May 2024, to all forms of portfolio management services. As the SDR and labelling regime are developed principally for the benefit of retail investors, the proposed extension is aimed at wealth management services for individuals and model portfolios for retail investors, though firms offering portfolio management services to professional clients can opt into the labelling regime.

What is the anti-greenwashing rule?

The FCA has emphasised that tackling greenwashing - where firms make exaggerated, misleading and/or unsubstantiated sustainability claims regarding their products or services - is a regulatory priority. From 31 May 2024, ESG 4.3.1R -'the anti-greenwashing rule' - will apply to client communications and financial promotions of all FCA-authorised firms - providing that when a claim is made regarding a financial product or service's sustainability characteristics (a concept which is defined to capture both environmental andsocial characteristics), the firm will be responsible for ensuring that this claim is:

a. accurate; and

b. fair, clear and not misleading.

Why is the non-handbook guidance important?

The non-handbook guidance is intended to help firms gain a better understanding of the FCA's expectations regarding the application of the anti-greenwashing rule, with (non-exhaustive) practical examples included throughout. Firms (including those firms applying for authorisation from the FCA) should therefore review the guidance to ensure their understanding of the FCA's expectations of the rule, and consider the changes to be built into their client communications and financial promotions frameworks and the related monitoring processes.

The guidance clarifies that:

1. The anti-greenwashing rule is intended to complement and be consistent with: (i) other FCA 'fair, clear and not misleading' requirements; (ii) the Consumer Duty's consumer understanding outcome rules under PRIN 2A.5; and (iii) the ASA requirements and CMA guidance relating to environmental claims.

2. While the scope of the anti-greenwashing rule relates to products and services, firms are reminded that the CMA and ASA Guidance, FCA Principles 6 and 7, or (as relevant) the Consumer Duty (Principle 12 and PRIN 2A), apply to sustainability-related claims that a firm may make about itself as a firm.

3. Further, firms should take into account how firm-level claims may be considered as part of the 'representative picture' in a decision-making process.

4. Sustainability claims should:

• be factually correct and capable of being substantiated with robust and credible evidence, for as long as the claim is being communicated (i.e. however long the financial promotion is live);
• be clear and presented in a way that can be understood by the intended audience -for firms subject to the Consumer Duty, this will mean testing that communications are likely to be understood by customers and that they meet customers' information needs in a way that enables them to make effective, timely and properly informed decisions;
• be complete, such that they do not omit or hide important information, but rather provide a representative picture of the product or service and its full life-cycle; and
• only include comparisons to other products or services (including previous versions of the firm's own products or services) where such comparisons are fair and meaningful.

5. Where firms rely on third parties for information, they should consider whether it is appropriate to rely on such data, research or analytical sources to substantiate the claims being made.

Our thoughts

The finalised guidance serves as a helpful practical resource for firms - with numerous 'real-life' illustrative examples added following feedback received on its draft guidance, as well as further commentary on the scope of the rule and how it interacts with other FCA rules.

The significance of Points 2 and 3 above should not be underestimated - not least, in the current environment in which firms feel increasingly compelled to 'showcase' their own virtues (including sustainability credentials). The FCA's view that firm-related claims may be considered as part of the 'representative picture' in a decision-making process is a particularly noteworthy warning signal on which firms would be well-advised to reflect.

What is the FCA proposing?

In response to its initial 2022 consultation (CP 22/20) on the then-proposed SDR and labelling regime, the FCA received feedback relating specifically to the application of the regime to portfolio management firms. As a result of this feedback, the FCA is now proposing to extend the SDR and labelling regime to portfolio management services, as summarised below. "Portfolio management" in this context is defined as a service provided to a client which comprises either: (a) managing investments; or (b) private equity or other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement, the predominant purpose of which is investment in unlisted securities.

The FCA proposes to extend the SDR and investment labels regime to all forms of portfolio management services, including where the portfolio management offering (the agreements or arrangements) are model portfolios, customised portfolios and/or bespoke portfolio management services (tailored to the clients' needs and preferences).

• Labels: In addition to meeting the other qualifying criteria under ESG 4.2.4R, portfolio management offerings will be able to use a sustainability label if 70% or more of the gross value of the assets within the portfolio are invested according to the sustainability objective.
• Naming and marketing rules: All portfolio management offerings to retail investors will be subject to the naming and marketing rules under ESG 4.3.
• Consumer-facing disclosures: Production of consumer-facing disclosures (with the information required under ESG 5.2) when the firm uses a label or sustainability-related terms without a label.
• Product-level disclosures: Production of pre-contractual disclosures and ongoing product-level disclosures when using a label or sustainability-related term without a label.
• Entity-level disclosures: Firms with over GBP 5 billion in AUM will need to produce entity-level disclosures in relation to the overall assets managed in relation to the relevant business.
• Distributor rules: Distributors will need to provide labels and consumer-facing disclosures to retail investors.

What is the timeline for implementation?

The FCA is accepting feedback to its consultation until 14 June 2024. Following this, it intends to publish the final rules in the second half of 2024, with the following suggested implementation timeline:

Rules	Proposed implementation date
Labelling, naming and marketing requirements and the associated consumer-facing and pre-contractual disclosures	2 December 2024
Ongoing product-level disclosures	2 December 2025*
Entity-level disclosures	For firms with AUM over GBP 50 billion: 2 December 2025*
For firms with AUM over GBP 5 billion: 2 December 2026*

* Consistent with the dates on which the rules will be in force for fund managers.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Financial Services Regulatory practice.

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