The regulator has also already expressed concerns regarding the quality of ESG disclosures in the markets.
In 2023, the regulators wrote to benchmark administrators concerning a lack of transparency of methodology in respect of ESG claims (administrators of financial benchmarks are already regulated by the FCA under the UK benchmark regulations), and, as early as 2021, it warned fund managers that information disclosures provided in support of funds marketed as ‘sustainable’ or as having an ESG focus were often poor.
What could this mean for regulatory enforcement?
As with any new regime, market participants are likely to be given time to comply before any enforcement action is taken.
Nonetheless, the regulator is already active in the ESG field: Reeves’ announcement comes soon after the FCA’s confirmation in June 2024 that it has opened a climate-related enforcement investigation against a company. This is understood to be its first and was revealed following a freedom of information request.
What enforcement for ESG benchmark providers could look like remains to be seen, but the regulation of administrators of financial benchmarks (that is, those connected to the costs of lending), in place since 2018, may provide clues.
This regime also focused on the quality of data and governance, including managing conflicts of interest.
The FCA’s stated strategy for supervising benchmark administrators, issued in 2022, was that it would be carefully monitoring the quality of disclosures made, based on a sample taken from the market.
The regulator’s letter that followed in 2023 left the market in little doubt that, not only was the regulator scrutinising their work, but that, bar significant improvements in meeting regulatory expectations, enforcement action would follow.
It is also worth noting that in addition to requiring FCA authorisation, firms that administer financial benchmarks are also subject to the FCA’s senior managers and certification regime. This means that enforcement action for misconduct can be brought against key staff, as well as firms themselves.
Looking ahead
The FCA’s current expectations in this area can be found in the existing voluntary code of conduct. It is therefore a good starting point for any firm wishing to be well placed to comply with any new regime.
As this field is drawn into further focus, firms should be reminded that the FCA already has powers to bring regulatory and criminal enforcement action for the mis-selling of financial products including, in some circumstances, against unregulated entities.
Firms should therefore be carefully considering the accuracy of any statements they make on this topic, irrespective of the arrival of a new regulatory regime.
James Tyler is Of Counsel at Peters & Peters
