Committee asks for clarity from the Financial Conduct Authority on its plans to combat greenwashing

The Treasury Sub-Committee on Financial Services Regulations has written to the Chief Executive of the UK’s Financial Conduct Authority (FCA), Nikhil Rathi, in a letter dated 9 March, asking for clarity on certain aspects of its proposed plans to combat greenwashing by investment funds, particularly around the FCA’s enforcement plans in instances where consumers have been misled.

The correspondence from the Sub-Committee follows an oral evidence session on 22 February, which examined the FCA’s recent proposals on what constitutes a ‘sustainable’ investment. The Treasury Committee’s Sub-Committee on Financial Services Regulation has been tasked with carrying out an inquiry into the sustainability disclosure requirements associated with greenwashing.

The Sub-Committee explains that it is concerned that the FCA’s cost-benefit analysis of its proposed new regulations contained within the sustainability disclosure requirements and investment labels consultation falls short, especially in regard to what the Sub-Committee deems to be the potential “substantial” costs to consumers. Given that the FCA’s cost-benefit analysis fails to consider the costs to consumers entirely, the Sub-Committee states that it is very difficult to assess whether the design of the relevant proposals has been sufficiently considered.

The letter, therefore, makes several requests of the FCA to address its concerns: firstly, that the FCA provide a new cost-benefit analysis that estimates the monetary and other costs of its proposals to consumers; secondly, clarity on what enforcement work the FCA will be carrying out to make sure that where fund managers have been promoting misleading products, the FCA will pursue redress for consumers; and thirdly, if the FCA does not intend to pursue enforcement action against the funds that are believed to have misled consumers, the FCA is asked to provide the legal basis for not doing so.

In addition to this, the Sub-Committee has asked for further information from the FCA on international divergence or convergence relating to the UK’s proposed disclosure requirements. Specifically the letter asks for the following: firstly, for the FCA to set out its assessment of the risks to consumers and to the funds industry, were the FCA requirements to be too onerous for US or EU based funds; secondly, whether there is a risk that non-UK based funds might choose not to meet the UK’s criteria and as a result UK consumers would have less choice; and thirdly, whether there is a risk that UK based funds might have to spend time and money to become compliant with three separate jurisdictional ESG criteria, resulting in additional management costs that will be passed on to consumers.

The Sub-Committee has requested that the FCA provide its response by 23 March.

Commenting on the correspondence, Harriett Baldwin MP, Chair of the Treasury Committee, who signed the Sub-Committtee's letter to the FCA, said: “Consumers who invested in funds believing they were doing their bit to save the planet must not be made to bear the cost of moving if they find out their fund isn’t so green after all. Without a comprehensive cost-benefit analysis, the regulator’s proposals are lop-sided. Further work on what the costs are going to be, who will pay, and how the regulator will enforce the rules is clearly necessary.”