Consumer Duty and ESG: Is there a link?

Should firms be factoring ESG into Consumer Duty implementation?

In November 2021, the FCA announced its ESG Strategy setting out their desired outcomes and the actions they intended to take to support the financial sector drive positive change. Two themes of the strategy were ‘Transparency’ and ‘Trust’ and the recently published Sustainability Disclosure Requirements regime is the most important action the FCA have taken so far to deliver on these. The same themes are present throughout another significant piece of regulation, Consumer Duty; prompting us to consider if and how firms might need to consider the two regimes in parallel.  

The FCA’s Consultation Paper (CP22/20) on new Sustainability Disclosure Requirements (SDR) and investment labels was published on 25th October, just days before firms were required to have their Consumer Duty Implementation Plan agreed and signed off by the Board. Firms will therefore be forgiven if they haven’t considered links between the two regimes yet. However, the aims and desired outcomes of SDR and Consumer Duty are indeed related, particularly with regards to the consumer understanding.

The new anti-greenwashing rule

The so-called ‘anti-greenwashing’ rule (ESG 3.3.1) builds on existing rules and guidance to specify that sustainability-related claims must be clear, fair and not misleading. This rule applies to all regulated firms, regardless of whether they are carrying out sustainability in-scope business (e.g. fund management activities) or not.

In theory, existing FCA rules in PRIN and COBS concerning fair communications with clients already implicitly cover sustainability-claims. However, clearly FCA believe more is needed to tackle the issue of greenwashing.

The practical impact of implementing this new rule should therefore be minimal, assuming sustainability claims are already subject to the same verification and rigour as other statements in financial promotions. The greater impact of the new rule is a clear message that potential greenwashing will be under greater FCA scrutiny as the regulator will have an explicit rule to challenge firms on and to pin their supervisory/enforcement efforts to.

Communicating and policing the anti-greenwashing rule is where we see the link with Consumer Duty. Firms should consider to what extent the new anti-greenwashing rule can be weaved into relevant action points already identified in their Implementation Plan. For example, any gap analysis of communications against the Duty’s consumer understanding requirements should include an explicit assessment of any sustainability claims. We’d also expect firms to consider incorporating the anti-greenwashing rule into the staff training and policy and procedure update workstreams of their Consumer Duty Implementation Plans.  

This is especially important given the anti-greenwashing rule is expected to enter into force in June 2023, before the first Consumer Duty implementation date (30 July 2023). 

Ensuring SDR consumer-facing disclosures meet the CD consumer understanding requirements

Perhaps the most obvious link between the SDR and Consumer Duty is in relation to the consumer-facing disclosures. Under the current SDR proposals, fund managers will be required to prepare consumer-facing disclosures for retail investors, regardless of whether they use a sustainability label. The disclosures are expected to be a standalone document, presented alongside existing disclosures such as the PRIIPS KID.

The consumer disclosures will need to be presented in an accessible way and should contain sufficient information on the sustainability-related features of the investment product so that investors can assess whether the product meets their needs and preferences.

FCA are not introducing a prescribed template for these disclosures but are encouraging the industry to develop a market-led template based on the content and format used in the FCA’s behavioural research. Many, but not all, of the requirements under the consumer understanding rules could be addressed if the industry answers the FCA’s call to develop an appropriate template.

However, even if a template materialises, firms will still need to consider how they use and tailor this template in the context of the products they offer. They will also likely be expected to carry out their own testing and monitoring of consumer facing disclosures (a key part of Consumer Duty). For example, one element of the disclosure is a description of the firm’s “unexpected investments” i.e.  any investments which are inconsistent with (or may be reasonably perceived as being inconsistent with) the sustainability objective of that product. The assessment of what is or could be perceived as an “unexpected investment” may not always be simple, and the firm’s view of what is or could be “unexpected” or not, may not be the same as a consumer.  Therefore, testing will be important and necessary to aid consumer comprehension and decision making.  Firms should consider incorporating SDR-related testing and research into work already planned under Consumer Duty.

The SDR rules are still in draft and the first consumer disclosures are not expected until at least 30 June 2024, so firms have some time to consider how they will implement the new rules. However, we’d encourage firms not to leave it too late and consider how they might dovetail SDR preparation with Consumer Duty work already inflight.  

Distribution

Similar to Consumer Duty, FCA’s SDR proposals acknowledge the importance of market participants along the entire investment chain. Distributors are key to communicating sustainability-related information to consumers and are therefore explicitly brought within scope of the proposals.

Under the draft rules, distributors (including platforms and advisers) must ensure that they provide access to the consumer-facing disclosures and display the product’s sustainable investment label prominently (where the product uses one).  In addition, distributors must keep websites and marketing communications updated with any changes a firm makes to the label and disclosures.

FCA consider these proposals to be consistent with current expectations on distributors when making information available to investors. They also remind distributors that they must comply with existing requirements in PROD and under the new Consumer Duty.

For example, distributors and manufacturers will need to consider how they obtain and share information between them to ensure marketing communications remain accurate. And manufacturers will need to demonstrate they carry out appropriate due diligence on distribution. For example, what is the firm doing to assess a distributor’s compliance with the SDR rules (amongst other rules such as financial promotions and client categorisation)?

What next?

We advise firms not to wait until the Policy Statement is published to incorporate the FCA’s Sustainability Disclosure Requirements into the firm’s preparation for Consumer Duty. This is especially important in relation to the work undertaken in relation to the consumer understanding outcome of the Consumer Duty, which should explicitly include ESG and sustainability-relation information – even where products are unlikely to use a new sustainable investment label.   

Key dates to note include:

·        June 2023: the Policy Statement on the new Sustainability Disclosure Requirements and investment labels is expected

·        June 2023: the new ‘anti-greenwashing’ rule is expected to apply

·        July 2023: the Consumer Duty applies to open products  

·        June 2024: the first SDR consumer disclosures are expected