The Financial Conduct Authority is introducing a package of measures to address “greenwashing” concerns and help consumers navigate the market for sustainable investment products.

The FCA has acted in response to consumers increasingly demanding more sustainable products and services. As a result, there has been a growing number of products and services which claim to meet that demand.

The anti-greenwashing measures will apply to all FCA-authorised firms who make sustainability-related claims about products and services. The investment labels, disclosure and naming and marketing rules will apply to UK asset managers,

The FCA package includes:

• An anti-greenwashing rule for all FCA-authorised firms to reinforce that sustainability-related claims must be fair, clear and not misleading. FCA are also consulting on supporting guidance.
• Naming and marketing rules for investment products, to ensure the use of sustainability-related terms is accurate.
• Four labels to help consumers navigate the investment product landscape and enhance consumer trust.
• Consumer-facing information to provide consumers with better, more accessible information to help them understand the key sustainability features of a product.
• Detailed information targeted at institutional investors and consumers seeking more information in pre-contractual, ongoing product-level, and entity-level disclosures.
• Requirements for distributors to ensure that product-level information (including the labels) is made available to consumers.

The FCA believes this will ”help underpin the UK’s position as a world-leading competitive centre for asset management and sustainable finance.”

At present, while the FCA acknowledges the key role advisors play in supporting consumers, making investment decisions about sustainability options, no regulatory toolkit has been proposed. Instead, an independent working group to work with the industry on existing capabilities in sustainable finance, including how the SDR and labels, should be used by advisers.

However, it has yet to be ascertained whether a fund deploying an FCA sustainability label will be a suitable investment for an average retail investor looking to save for retirement, given the reduction in financial return that can be the result of following sustainability objectives.

The FCA  will consult “in early 2024” on a similar approach for portfolio management to that taken in its rules for UK funds, with a focus on portfolio management undertaken for UK retail clients.

The FCA’s anti-greenwashing rule will come into force in May 2024 and will apply to all authorised firms. The rule applies to all communications about financial products or services which refer to the environmental and/or social (i.e., ‘sustainability’) characteristics of those products or services.

Fund labelling and accompanying disclosures will start in July with the FCA rules providing  four optional labels – Sustainability Focus, Sustainability Improvers, Sustainability Impact, and Sustainability Mixed Goals – aimed at assisting consumers to differentiate between sustainability objectives and investment approaches to achieve those objectives.

These rules apply to UK managers of UK funds only and to satisfy investment policy and strategy, at least 70% of the product’s assets must be invested in accordance with its sustainability objective. Concerns have been expressed that the threshold is too high for a diversified product suitable for retail investors. There are also concerns that until common standards appear, verification of standards and comparison of products may be difficult.

The FCA has confirmed  firms can use a methodology or approach that is determined by industry practice, an authoritative body, or their own proprietary standards.

Where a fund uses a label, the manager must ensure a consumer-facing disclosure, a pre-contractual disclosure, a public product level sustainability report and a sustainability entity report are published.

 In December, naming and marketing rules will come into force for managers of non-labelled funds and distributors will have to ensure a notice is applied to relevant overseas funds marketed to retail investors making clear that the FCA rules on sustainability labels and disclosures do not apply.

Distributors and advisers are also subject to the anti-greenwashing rule and must therefore ensure all sustainability-related references comply with that rule. Managers and financial advisers need to be prepared to deal with questions and concerns from retail investors ahead of this date.

According to the FCA, following the introduction of the regime any choice to switch from an unlabeled product to a labelled one will be an individual consumer’s decision.

W Denis arrange competitive and broad form insurance for Asset Managers and other Financial Institutions. The regulatory burden on company managers, directors and officers is significant hence the importance of selecting an insurance broker which closely examines comprehensive policy wordings that capture coverage for the widest range of regulatory investigations as well as more traditional claims.

To discuss this further with a broker at W Denis, please make arrangements with Daniel Moss at [email protected] or on 0044 (0)113 2439812.