On 28 November 2023, the FCA published a much awaited policy statement, PS23/16 (the Statement), in which it set out the final rules and guidance for its sustainability disclosure and investment labelling regime. The regime, which is intended to strengthen consumer confidence in the sustainability claims of investment products, comprises a new anti-greenwashing rule, product labels, and naming and marketing requirements. It will come into force in stages from 2024.
The FCA consulted on its sustainability disclosure requirements and investment labelling rules in October 2022. In an update provided to industry at the end of March 2023, it said it had received approximately 240 responses and that there was "broad support" for the proposed regime although it noted that it had received "rich, constructive feedback on some of the detail."
In putting together its package of sustainability measures, the FCA has carefully reviewed the consultation responses and has also undertaken further testing with consumers and with firms. Through meetings and roundtable discussions it has engaged extensively with a broad range of stakeholders including other regulators, government, industry, consumer groups, the FCA's independent statutory panels, and, perhaps most importantly, members of the Disclosure and Labels Advisory Group.
In addition, it has taken into account:
- the findings from a multi-firm review of how firms are embedding its ESG guiding principles
- feedback from the Treasury Sub-Committee's inquiry on greenwashing.
Sacha Sadan, Director of Environmental, Social and Governance at the FCA has described the regime as "simple" and "easy to understand" and enabling investors to determine "whether funds meet their investment needs." It is hoped that by enhancing trust in sustainable investments, the UK will maintain and grow its reputation as a leading international centre for sustainable finance.
Overview of the final regime
The key elements announced in the Statement are as follows:
|Authorised firms making sustainability-related claims about their products and services must ensure that such claims are fair, clear and not misleading. The FCA is consulting on guidance to support this rule, replies to which must be submitted by 26 January 2024. The anti-greenwashing rule and guidance is due to come into force on 31 May 2024.
In its Statement, the FCA has confirmed that four labels will be introduced to assist consumers:
Three of these were proposed in the consultation. The Sustainability Mixed Goals label has been added by the FCA to accommodate funds that invest in a combination of the attributes of the Focus, Improvers and/or Impact labels.
It is for firms to decide whether to label products that aim to achieve positive sustainability outcomes. To use the labels, firms will need to meet general requirements (including notifying the FCA, publication), qualifying criteria, naming and marketing, disclosure and ongoing requirements.
Firms can start to use labels with accompanying disclosures from 31 July 2024.
To use a label, products must meet both general criteria and specific qualifying criteria for the particular label.
The criteria relate to:
|Naming and marketing rules
In addition to the anti-greenwashing rule, firms can only use sustainability-related terms in product names and marketing. The application of the product names and marketing rules depends on whether the firm uses a label.
The new regime includes a number of disclosure obligations. These relate to:
The timeline for the application of the disclosure obligations depends on whether the firm is using product labels or whether the firm is using sustainability-related terms without product labels and, in the case of entity-level disclosures, whether the firm's AUM is over £50bn or over £5bn.
For firms using product labels
Consumer-facing and pre-contractual disclosures can be used from 31 July 2024. Ongoing product-level disclosures apply from 31 July 2025 for public product-disclosures and 2 December 2025 for on demand product-disclosures.
Firms using sustainability-related terms without product labels
Consumer-facing and pre-contractual disclosures apply from 2 December 2024 and ongoing product-level sustainability disclosures apply from 12 months after the terms are first used.
These apply for the largest firms (firms with AUM over £50bn) from 2 December 2025 and for the smaller firms (firms with AUM over £5bn) a year later.
|Requirements for distributors
|Distributors will be required to ensure that product-level information (including labels) is made available to consumers.
The Statement on a number of occasions emphasises that the new regime is consistent with the FCA's Consumer Duty principle including the three cross-cutting obligations (acting in good faith, avoiding causing foreseeable harm, and enabling and supporting retail customers to pursue their financial objectives).
The new regime will not apply initially to portfolio management products and services. A consultation on the approach for portfolio management, including managed portfolios and discretionary wealth management services, will be published in early 2024.
The regime applies to UK funds only. The FCA is working with HMT to consider whether the regime can be extended to overseas recognised funds. It is for HMT to determine whether to extend the sustainability disclosure requirements rules to overseas funds.
Help is at hand
Our team has significant experience in sustainable finance regulation and can advise you on the application of the FCA's sustainability disclosure framework.