UK: FCA’s finalised guidance on the anti-greenwashing rule (AGR) and consultation on SDR and portfolio management

Why should I read this?

AGR finalised guidance (FG24/3)

The AGR, which comes into force on 31 May 2024, is a broad rule that applies to all financial services firms, not just fund managers and fund distributors. The rule requires any firm referring to the sustainability characteristics of a product or service to ensure that the reference is:

• consistent with the sustainability profile of the product or service; and
• clear, fair and not misleading.

The FCA’s finalised guidance FG24/3 “Finalised non‑handbook guidance on the Anti‑Greenwashing Rule”, published on 23 April 2024, sets out the FCA’s detailed non-handbook guidance on the application of the AGR. As part of the guidance, the FCA has also helpfully clarified some of the key questions that the industry has been grappling with in trying to comply with the AGR.

The finalised guidance provides that the AGR applies to references to the sustainability characteristics of financial products or services, and that those references must be fair, clear and not misleading. However, firms are also required to have regard to more general sustainability-related statements made about the firm itself. This is because the FCA considers that such statements can be seen to part of a “representative picture” of a product or service which may influence an investor. These general claims must therefore meet the requirements of the AGR and the guidance.

Kari McCormick, Partner in FSDI, comments:

“While the FCA did not need to introduce new rules to address greenwashing, the AGR and guidance does pave the way for greater intervention in this area for all regulated firms - particularly those marketing sustainable products to retail customers.”

SDR and portfolio management consultation paper (CP24/8)

The FCA’s consultation paper CP24/8 “Extending the Sustainability Disclosure Requirements (SDR) regime to Portfolio Management”, also published on 23 April 2024, sets out the FCA’s proposals for how the requirements of SDR will be extended to apply to portfolio management.

The FCA is proposing to apply a broadly similar approach to labelling for portfolio managers as introduced for fund managers, to have a consistent approach and create a level playing field. Portfolio management services provided to retail which do not use a label will be subject to the naming and marketing rules and a disclosure regime, equivalent to that for funds will apply to portfolio managers using a label or subject to the naming and marketing rules. By extending the SDR and labelling package to portfolio management, the FCA aims to help consumers navigate the sustainable investment market.

AGR Guidance

The AGR comes into force on 31 May 2024 and firms have been waiting to see the FCA’s detailed guidance to help them understand the extent of the FCA’s expectations. The guidance will also apply from 31 May 2024 when the AGR comes into force. There will be no transitional period.

The FCA is comfortable with the short notice it is giving for the guidance on the basis that the AGR is not introducing new obligations.

Michaela Walker, European Head of Financial Services Sector and Partner in the Financial Services team in London, comments:

“The AGR guidance is welcome and has provided us with a few more pieces of the jigsaw, however, the application of the AGR remains challenging and firms may still feel that they do not have the full picture.”

What should I do?

The rule is designed to deter misleading marketing practices related to green or sustainable financial products.

While firms should already ensure that their fund information and communications are clear, fair and not misleading under PRIN 2.1, Principle 7, and COBS 4.2.1R, the introduction of the AGR will give the FCA “an explicit rule on which to challenge firms […] and take enforcement action against them as appropriate” (CP22/20).

This is wider than just Prospectus and KIID disclosures and, if they have not already done so, firms should commence a review of all of their public facing documents to:

• identify sustainability claims being made about products and services
  • this will include claims made about the firm generally if those claims are part of the ‘representative picture’ in relation to the products and services
• identify the channels through which sustainability claims are made
• identify whether sustainability claims reflect the Consumer Duty
• review governance structures, policies and procedures to ensure compliance with FCA expectations
• amend or withdraw noncompliant sustainability claims
• collate and retain evidence in support of sustainability claims

The FCA is concerned about of the extent of greenwashing they perceive to be taking place. All FCA-authorised firms must focus on checking that their policies and procedures around sustainability claims are in line with FCA expectations, and that any sustainability claims currently in circulation meet the requirements of the AGR and guidance.

What else do I need to know about the AGR guidance?

Interaction with existing rules on communications with consumers

Prior to the guidance being issued, concerns were raised about how the AGR interacted with the existing rules in the Handbook that require communications with consumers to be “clear, fair and not misleading”, which are in turn reinforced by the consumer understanding outcome of the Consumer Duty.

The FCA has confirmed that the AGR is “consistent with” and doesn’t override those other rules that require communications should be fair, clear and not misleading.

The AGR applies at the level of products and services. This contrasts with other regulatory regimes which apply at entity level: competition rules from the Competition and Markets Authority (CMA), advertising rules from the Advertising Standards Agency (ASA) (although the ASA and CMA frameworks apply to products and services, too), the FCA’s PRIN 9 (Customers’ Interests) and the Consumer Duty. However, it is important to note the FCA’s view that entity level claims can influence investors and so entity level disclosures should also be taken into account.

The FCA says:

“Firms are subject to other rules and expectations regarding the claims firms make about themselves and other firm‑level disclosures but should nevertheless take into account how firm‑level claims may be considered as part of the ‘representative picture’ in a decision‑making process. Firms should also consider the expectations and obligations under CMA guidance and ASA requirements”

Does the AGR apply to overseas funds?

The position of the AGR in relation to overseas funds has been uncertain given the wording in PS23/16 as to the scope of the AGR. This has now been clarified in the guidance.

The guidance provides:

“The rule applies in relation to financial products and services which FCA-authorised firms make available for clients in the UK. This includes financial promotions that authorised firms communicate or approve for unauthorised persons (including for overseas products and services where the promotion is approved in the UK).”

Overseas funds currently in the temporary marketing permissions regime (TMPR) are deemed to be authorised (and can approve their own financial promotions) and so will be subject to the AGR.

Once the overseas funds regime (OFR) comes into force, overseas funds that have transferred into the OFR from the TMPR or which are new funds recognised under the OFR will not automatically be considered to be authorised for the purposes of approving their own financial promotions (although they will be able to apply to be so authorised, in which case they will be subject to the AGR). Their financial promotions will need to be considered by an authorised person, who will in turn be subject to the AGR.

Examples of good and bad practice

The FCA has responded to industry calls for more examples of good and bad practice relating to more sectors of the industry by building out some of the existing examples to give more detail and adding new examples of “good practice”.

Enforcement and supervisory priorities

The guidance is silent on the FCA’s enforcement and supervisory approach and what its priorities may be other than to note that the FCA will adopt its “usual” approach to supervision and enforcement. CP24/8 does note that the FCA will undertake a review of SDR in 3 years’ time which we assume will also include the AGR but given the fact that the FCA has said anti-greenwashing is a regulatory priority for them, we can expect to see action taken before this 3 year review.

Guidance on providing clear communications

Firms should consider whether the information they are providing is useful for the intended audience. If a claim is being communicated to a professional client, firms may not need to include the same information or present it in the same way as they would for a communication addressed to a retail client.

Should a firm wish to use an image in its sustainability‑related claims, it should be consistent with the sustainability characteristics of the product or service.

The guidance does not extend to the use of images, logos, and colours that are not intended to refer to, or describe, the sustainability characteristics of a product or service. This may prove a fine line to tread. Will it be reasonable to illustrate your documents with an appealing picture of a forested landscape and use a green colour palette throughout if your fund has no environmental aim? The FCA notes that other rules may apply, for instance those of the ASA, which may consider such presentation as misleading.

Guidance on providing complete communications

When making a sustainability claim, firms should consider what information is necessary to include to give a representative picture of the product or service.

The FCA has provided new examples relating to sustainable benchmarks, asset selection when supporting the transition to decarbonisation, and comparisons.

Greenwashing risks

The guidance affirms that there are clear risks to firms that make claims about their own business that may amount to greenwashing, as well as misleading claims about products and services. This could take the form of reputational damage and loss of business, increased supervisory activity from the FCA, enforcement action, action from another regulator or litigation. Claimant firms and ESG funders will be watching these developments carefully and looking for ways to bring mass mis-selling claims off the back of any systemic greenwashing. We can expect to see the FCA exercising its supervisory powers in the immediate future to check how firms are meeting the AGR. With the ASA and CMA having already investigated and published outcomes in a number of greenwashing cases, the FCA may feel compelled to make an example of firms that fail to demonstrate compliance.

SDR and portfolio management consultation paper

In CP24/8, published on 23 April 2024, the FCA has set out its proposals to extend SDR to portfolio management firms. This represents an evolution of the FCA’s thinking on the application of SDR to portfolio managers, which it first consulted on in CP22/20 “Sustainability Disclosure Requirements (SDR) and investment labels”. Strong market feedback to that consultation has caused the FCA to reconsider the proposals, which are now materially similar to the SDR applicable to funds.

It is interesting to note that the FCA has asked a lot of questions about the scope of the regime to gauge industry’s appetite for the SDR regime. It is unclear, however, how the FCA will deal with a lot of negative feedback to the proposals given the regime is due to come into force on 2 December 2024 and the final rules will only be published in the second half of 2024.

What do I need to know about the proposals?

The proposals are intentionally similar to the SDR requirements applicable to funds to ensure a level playing field and will also need to be implemented on a comparable timetable which is very tight.

What is in scope?

Firms providing a broad range of portfolio management services to clients on a discretionary (and/or advisory in relation to private markets) basis, including where the firm is offering model portfolios, customised portfolios and/or bespoke portfolio management services (tailored to an individual customer’s needs and circumstances) will be in scope. While the scope is broad, the proposals are primarily aimed at services and products provided to retail investors, such as wealth management services for individuals and model portfolios for retail investors.

Portfolio managers offering services to professional clients or institutional investors will be able to opt in to the labelling regime and its disclosure requirements, but will not be subject to the naming and marketing requirements and associated disclosures.

Services provided to clients outside the UK are not proposed to be in scope and neither are services provided from an establishment outside the UK. Neither are portfolio management services provided to a fund or fund manager, such as where portfolio management has been delegated by an AIFM or a UCITS ManCo.

What are the key features of the proposals?

Essentially the FCA is proposing to hold portfolio managers to the same standards as fund managers in respect of claims regarding sustainability.

• Labelling

Portfolio managers that want to use a label on their offering will need to comply with general and specific criteria relating to that label. These are broadly in line with the requirements applicable to the labelling requirements for fund managers, including the need for a sustainability objective, a robust evidence based standard of sustainability, KPIs etc as well as disclosures to be made regarding how the portfolio qualifies for the label. This represents a material change from the original proposals which included that, to use a label, 90% or more of the constituent products in which a portfolio invested had to qualify for the same label.

• Naming

Portfolio managers will only be able to use sustainability-related terms in names or marketing if the portfolio (i) qualifies for and uses a label, or (ii) does not use a label but complies with separate naming and marketing rules. These include that the terms ‘sustainable’, ‘sustainability’, ‘impact’ and any variation of these are not used and that the portfolio manager makes the same types of disclosures as are required when a label is used. The portfolio manager will additionally have to clearly set out that the offering does not have a label and explain why.

• Marketing

If a portfolio management offering has a label, portfolio managers will need to ensure that financial promotions of that offering are consistent with the label and any associated disclosures. If an offering does not have a label, but uses sustainability-related terms or themes in financial promotions, the manager will need to include the same types of disclosure as are required under the naming rules.

• Disclosure

Product-level disclosures to consumers should be made in a new, standalone, 2-page (if printed) consumer-facing disclosure (CFD) document, which will need to be reviewed and updated annually. Detailed pre-contractual disclosures will be required. These disclosures need to be public facing if the product’s other literature is similarly public – otherwise they must just be provided to investors. All firms with assets under management (AUM) of more than £5bn will be required to annually disclose certain information about their governance and management of sustainability-related risks and the metrics and targets they use to assess and manage those risks.

• Distributors

Distributors, such as financial advisors and platforms, will need to communicate the labels used for portfolio management offerings and provide access to the associated disclosures. The FCA has established a working group for financial advisors to support advising customers on products making claims about sustainability.

When will these requirements come into force?

Portfolio management firms will be able to use labels from 2 December 2024 with the associated pre-contract disclosure rules, and the naming and marketing requirements, also applying from that date.

Ongoing product-level disclosures will need to be made from 2 December 2025, from which date entity-level disclosures will be required for firms with AUM of over £50bn. Entity level disclosure rules will apply to all firms with AUM over £5bn from 2 December 2026.

In this way the FCA will quickly bring the portfolio management SDR in line with that applicable to fund management, recognising the desire by the market to implement the rules quickly, but with a down side being that fund managers will have had longer to prepare (especially for the labelling rules).

Phil Spyropoulos, Partner in the Financial Services team, comments:

“Fairly little in CP24/8 will come as a surprise to wealth managers and model portfolio providers who have been following SDR. All the elements are here. What might shock is the ambitious timing.”

What steps should I take?

The consultation paper has significant practical implications for portfolio managers. Portfolio managers will need to adhere to materially the same SDR and labelling requirements as fund managers. This is intended to create a level playing field across the investment sector.

Portfolio managers should:

• consider if their products and services are in scope
• ensure their products and services are compliant with SDR – by 2 December 2024 under the FCA’s current timetable
• consider using the four voluntary investment labels
• start planning for the potential impact of these changes on their operations
• comply with the AGR and the guidance at the product and services level
  • if they make claims about their firm which can be considered to be part of the representative picture of a product or service, those general claims must meet the requirements of the AGR and the guidance too

Portfolio managers should respond to the consultation with their views and any concerns either directly or indirectly.

Further reading on SDR

See our previous client briefings and podcasts:

• UK’s FCA releases its Policy Statement on Sustainability Disclosure Requirements (SDR) and investment labels
• Access to the UK market for EEA funds: the proposed Overseas Funds Regime and the coming Sustainable Disclosures Requirements regime
• A Q&A discussion podcast: UK FCA's Policy Statement on Sustainability Disclosure Requirements (SDR) and investment labels

Next steps – SDR portfolio management consultation

Eversheds Sutherland will be responding to the SDR portfolio management consultation which closes on 14 June 2024. If you would like to respond to the consultation but do not want to submit your response directly, we can include your comments in our response on an attributed or anonymous basis.

The FCA plans to publish its final rules in the second half of 2024 and currently plans for those rules to come into effect on 2 December 2024.

How Eversheds Sutherland can help

We have extensive experience and expertise in advising clients on ESG matters. As well as our day-to-day work, our active engagement in the industry, such as our work with the Investment Association on their guidance on the application of the FCA’s Guiding Principles and our participation in the FCA’s Disclosures and Labels Advisory Group, means we are well-versed in the regulatory landscape and best practices in this area.

Our dedicated team of lawyers has been closely following the development and implementation of SDR. We have also developed a range of tools and resources to help our clients navigate the changing ESG landscape, including SDR, greenwashing and the application of the FCA’s Guiding Principles, such as training presentations, checklists, templates, and guides and we will be working with the Investment Association and other trade bodies to develop further industry guidance.

We recognise that SDR will require a lot of internal resource and will complicate business-as-usual updates to your range. The experience we have already had from applying the rules in PS23/16 to funds shows that the application of the SDR requirements is very much on a case-by-case basis – this is not a project where one size fits all. We are confident that we can provide you with high-quality, tailored, timely and cost-effective legal assistance on SDR.