The FCA is a private financial regulatory body in the United Kingdom (UK). The Authority’s purpose is to regulate the conduct of many of the businesses located in the UK in order to maintain integrity and stability within the financial markets. In other words, it is the UK’s version of the Security and Exchange Commission, except that the FCA works independently from the country’s government.

In the future the FCA will focus on a streamlined portfolio of cases, aligned to its strategic priorities where it can deliver the greatest impact. The FCA will also close those cases where no outcome is achievable, more quickly.

Transparency Is The Top Priority

The FCA’s hopeful strategy represents a significant departure from the current practice, where investigations are only announced in very limited circumstances. As part of the new approach the FCA has begun a consultation on plans to be more transparent when an enforcement investigation is opened. Under the plans the FCA will publish updates on investigations as appropriate and be open about when cases have been closed with no enforcement outcome.

“By being more transparent when we open and close cases we can enhance public confidence by showing that we are on the case,” said Therese Chambers, Executive Director of Enforcement and Market Oversight at the FCA. “At the same time, we will amplify the deterrent impact of our work by enabling firms to understand the types of serious failings that can lead to an investigation, helping them to change their own behavior more quickly. Greater transparency will also drive greater accountability for us as an enforcement agency.”

Steve Smart, also Executive Director Enforcement and Market Oversight added onto Director Chambers’ announcement in stating the following: “Reducing and preventing serious harm is a cornerstone of our strategy. By delivering faster, targeted and transparent enforcement, we will reduce harm and deter others. We will also make greater use of our intervention powers to stop harm in real time.”

Any decision to announce an investigation would be taken on a case-by-case basis and depends on a variety of factors which will indicate whether to do so is in the public interest. These include whether the announcement will protect and enhance the integrity of the UK financial system, reassure the public that the FCA is taking appropriate action, or assist in any investigations.

Announcing an investigation does not mean that the FCA has decided whether there has been misconduct or breaches of its requirements. Investigations into individuals will be different and the FCA will not usually announce these types of investigations.

These changes exhibit a significant shift in the FCA’s enforcement approach. In implementing this new approach, the FCA hopes to deliver quick resolutions to each of its enforcement actions in an efficient manner. Through this, the Authority hopes to implement a sense of transparency, accountability and integrity within the UK’s financial marketplace.  

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The FCA’s measures include putting in place new sustainability disclosure requirements and an investment labels system, as well as an “anti-greenwashing” rule. The regulator says it conducted “detailed engagement with a range of stakeholders, including industry, other regulators, and consumer groups.” The move follows similar ESG regulations adopted by the EU in recent years.

The sustainability disclosure requirements are designed to provide clarity and standardization in how sustainability is measured and reported. Investment firms will be required to produce consumer-facing disclosures summarizing the product’s key sustainability characteristics. The FCA says this would “help consumers to understand those characteristics and compare similar products.” The consumer-facing disclosure will be required by firms for all products, including those which were not engaged in sustainability-related strategies.

A second measure will regulate labels ESG investment products use that will assist investors in understanding how their investments align with specific sustainability goals. There will also be an anti-greenwashing rule, which mandates that all authorized firms ensure their sustainability-related claims are fair, clear, and not misleading.

“Research has shown that investors weren’t confident that sustainability-related claims made about investments were genuine,” the FCA said in a statement. “This isn’t helped by a lack of consistency when firms use terms such as ‘green’, ‘ESG’ or ‘sustainable.'”

To tackle this issue, the FCA will introduce:

• An anti-greenwashing rule for all authorized firms to make sure sustainability-related claims are fair, clear and not misleading
• Product labels to help investors understand what their money is being used for, based on clear sustainability goals and criteria
• Naming and marketing requirements so products cannot be described as having a positive impact on sustainability when they don’t

“We’re putting in place a simple, easy to understand regime so investors can judge whether funds meet their investment needs. This is a crucial step for consumer protection as sustainable investment grows in popularity,” said Sacha Sadan, director of environmental, social, and governance at the FCA. “By improving trust in the sustainable investment market, the U.K will be able to maintain its position at the forefront of sustainable finance, and capture the benefits of being a leading international center of investment.”

Sustainability Labeling System

Investment firms will need to satisfy a set of requirements in order to use specific investment labels to help consumers navigate the investment product claims and differentiate between various sustainability objectives. The new system offers four different labels with specific requirements:

• Sustainability Focus: applicable to products investing mainly in assets that are sustainable for people and the planet. Firms will be tasked to set their own “robust, evidence-based” standards to ensure they align with the product’s sustainability objectives.
• Sustainability Improvers: applicable to funds investing in assets that may not be sustainable now, but aim to improve their sustainability for people and the planet over time, including in response to the firm’s stewardship influence. This category focuses on the assets’ potential to meet the standards over time, placing an even higher emphasis on firms’ asset selection processes.
• Sustainability Impact: applicable to funds investing in solutions to problems impacting people or the planet to achieve “real-world impact.” These products will need to have an explicit objective to achieve a positive and measurable contribution to sustainability outcomes.
• Sustainability Mixed Goals: applicable to funds investing across different sustainability objectives and strategies aligned with the other three categories. This means firms will also need to disclose details of the proportion of assets invested “in accordance with each relevant label.”

The anti-greenwashing rules will be the first to take effect starting in May of 2024, followed by the labelling system at the end of July 2024 and the naming and marketing rules, which will apply starting in December 2024.  

Joseph McCafferty is editor & publisher of Compliance Chief 360°.

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