Climate change

GREEN FINANCE: A ROADMAP TO SUSTAINABLE INVESTING
In the run-up to COP26, on 18 October 2021, the UK government published its policy document titled Greening finance: a roadmap to sustainable investing. The Roadmap details the government's proposals for greening the financial system and aligning it with the UK's commitment to net zero by 2050. The government's plan will be split into three phases as follows:

1. Informing investors and consumers – addressing market information gaps, and ensuring decision-useful information on sustainability is available to financial market decision-makers
2. Acting on the information – ensuring sustainability information is used in business and financial decisions
3. Shifting financial flows – so that they align with the UK's commitment with a net zero and nature-positive economy.

The Roadmap focuses on phase 1. There are three components to phase 1, being:

1. Sustainability disclosure requirements – building on the UK's Taskforce for Climate-related Financial Disclosures (TCFD) implementation, the sustainability disclosure requirements will cover:
   • corporate disclosures in accordance with International Sustainability Standards Board (currently being formed by the International Financial Reporting Standards (IFRS) Foundation) standards and disclosure on environmental impacts in accordance with the UK's Green Taxonomy (which is yet to be developed)
   • asset manager and asset owner disclosures on how they take sustainability into account
   • investment product disclosures – The FCA has released a discussion paper on sustainability disclosure requirements (see below), and plans to consult on policy proposals in Q2 2022. We note that the TCFD disclosure may already be mandatory for a number of companies by the time the sustainability disclosure requirements apply.

   Economic activities must make substantial contribution to one of six environmental objectives to be taxonomy aligned

2. UK Green Taxonomy – creating a taxonomy which defines the criteria that economic activities must meet to be considered environmentally sustainable. The Taxonomy will have six environmental objectives (i.e. categories), and each will be supported by more detailed technical screening criteria. In order for economic activities to be considered ‘taxonomy aligned’, they must make substantial contribution to one of the six environmental objectives, do no significant harm to the other objectives, and comply with a number of minimum safeguards. The six environmental objectives are:
   1. Climate change mitigation
   2. Climate change adaptation
   3. Sustainable use and protection of water and marine resources
   4. Transition to a circular economy (i.e. reusing and recycling products as long as possible)
   5. Pollution prevention and control
   6. Protection and restoration of biodiversity and ecosystems.


3. Responsible stewardship – with the expectation that asset owners and managers in the pensions and investment space will play a role in responsibly allocating capital, making use of their ownership rights and influence over investee companies, while fulfilling their fiduciary responsibilities.

It is clear that the government has recognised the important role that financial services will play in the fight against climate change, and it is driving that change through targeted policy.

DISCUSSION PAPER ON SUSTAINABILITY DISCLOSURE REQUIREMENTS
Building on the government's Roadmap, on 3 November 2021, the FCA published a discussion paper on Sustainability Disclosure Requirements and investment labels (DP21/4).

Applicability
The proposals under discussion would be applicable to certain asset managers and FCA-regulated asset owners, and their investment products. However, the FCA appreciates the role that financial advisers play in distribution and providing consumers with information on investment products. Accordingly, it is considering how to introduce sustainability-related requirements and will develop proposals in due course.

Overarching approach
The FCA's proposed approach comprises a three-tiered system incorporating labels and disclosures as follows:

1. Product labels – a standardised product classification and labelling system
2. Consumer-facing disclosures – providing standardised information on the product's key sustainability attributes
3. Detailed disclosures at both product and entity level – further details at these levels might be more relevant to institutional investors and other stakeholders.

Product labels
The FCA proposes five categories of labels as follows:

1. Not promoted as sustainable
2. Responsible – may have some sustainable investments
3. Transitioning – sutainable characteristics, themes or objectives. Do not yet have a high allocation to UK Taxonomy-aligned sustainable activities
4. Aligned – sutainable characteristics, themes or objectives. High allocation to UK Taxonomy-aligned sustainable activities
5. Impact – objective of delivering positive environmental or social impact.

The categories would apply at product level, and the FCA sets out its thoughts on criteria for the classification and labelling system. The FCA also seeks views on whether it should apply a baseline of ‘entry-level criteria’ at entity level.

Disclosures
Consumer facing disclosures should provide the key sustainability attributes of the relevant product. The FCA is considering prescribing a baseline set of metrics so consumers can track sustainability performance over time, and anticipates a design that can be easily read alongside the Key Information Investor Document.

Detailed underlying disclosures will be required at both product and entity level.

The entity level disclosures will build on the FCA's work towards mandatory TCFD disclosures for certain firms.

As mentioned in the Roadmap, the government proposes disclosures in accordance with International Sustainability Standards Board standards – which develop and provide more specificity on TCFD requirements – and disclosure on environmental impacts in accordance with the UK's Taxonomy (which is yet to be developed).

Next steps
The FCA will develop policy proposals which it intends to consult on in Q2 2022.

CLIMATE CHANGE ADAPTATION REPORTS
The FCA, PRA and The Pensions Regulator (TPR) published their Climate Change Adaptation reports on 28 October 2021, following the government's invitation to do so in the Climate Change Act 2008. These reports set out how climate change affects their respective responsibilities, and their strategies/actions being taken in response. More specifically:

TPR's report explains that all the schemes it regulates are exposed to climate-related risks through their investments – including physical risks, transition risks (i.e. from transition to a low-carbon economy), and litigation risks. It explains:

• that trustees who are required to prepare a Statement of Investment Principles should include a policy on environmental considerations which they consider financially material
• that TPR's proposed new code of practice includes several modules that refer to climate change
• that, from 1 October 2021, the TCFD recommendations apply to certain defined benefit and defined contribution occupational pension schemes, including in relation to climate change disclosures, governance, risk management, scenario analysis, and metrics and targets.

TPR's report also sets out findings from industry research on climate change.

The PRA's report examines:

• the risk that climate change poses to PRA regulated firms
• progress made by firms towards management of those risks and compliance with the PRA's Supervisory Statement 3/19, which sets out the PRA's climate-related expectations. The PRA's expectations are centred around climate change governance, risk management, scenario analysis, disclosure
• more generally, the relationship between climate change and the regulatory capital regime for banks and insurers.

The FCA's report sets out:

• the risks of harm climate change poses to the FCA's statutory objectives of consumer protection, market integrity, and effective competition – including risks from greenwashing, the need for transparency and appropriate environmental disclosures, and the need to ensure that effective competition within the markets and innovation drives the development of more sustainable solutions
• the FCA's assessment of how firms across the pensions and retirement income, retail investments, retail lending, wholesale markets, and general insurance underwriting sectors are managing climate-related financial risks – including insurance underwriting risk, credit risk, financial market risk, and operational risk – and what more needs to be done
• how the sector is making commitments to and transitioning to net zero, along with challenges to this – including in relation to data and information available, which targets, metrics and methodologies to use in measuring their alignment to net zero, the impact on business relationships, interaction with public policy, and the pressure from investors to disinvest in companies being slow to transition to net zero rather than assist in that transition through investor stewardship
• the need for efficient capital allocation in the transition to net zero, how the UK capital markets can assist with investment for decarbonisation, and the challenges to this – including negative externalities from high-carbon projects not being priced in, policy uncertainty, misaligned incentives, information inadequacies, and behavioural biases and decision-making considerations.

The FCA also sets out a timeline of publications into 2022, including:

• H1 2022 – Feedback statement on ESG and capital markets
• spring 2022 – Feedback statement and consultation papers on sustainability disclosure regime and product labels
• summer 2022 – the FCA's first TCFD-aligned report. 

CLIMATE FINANCIAL RISK FORUM PUBLISHES FURTHER GUIDES
The Climate Financial Risk Forum (CFRF) is an industry forum co-chaired by the PRA and the FCA, with the aim of sharing best practice on managing climate-related financial risks and opportunities. In June 2020 the CFRF published its first round of guides (Session 1 guides) covering the topics of climate-change financial risk management, scenario analysis, disclosures, and innovation.

On 21 October 2021, the CFRF published its second round of guides (Session 2 guides) building on the Session 1 guides, focusing in further detail on risk management, scenario analysis, disclosure, innovation, and climate data and metrics.

The CFRF Scenario Analysis Working Group is also working on an online climate scenario analysis narrative tool to support smaller firms, planned to launch in the first quarter of 2022.

Enforcement and remediation

FCA FINES SECOND FIRM FOR CUM-EX TRADING AML SYSTEMS AND CONTROLS FAILINGS

The FCA has fined Sunrise Brokers £642,000 for inadequate anti-money laundering systems and controls.

Between February and November 2015, Sunrise executed purported over the counter equity cum-dividend trades to a value of approximately £25.4bn in Danish equities and £11.2bn in Belgian equities, receiving commission of £466,652. The trades took place on or around the last day of cum-dividend trading, and once executed they were later reversed. The trades appear to have been undertaken by the clients to benefit from withholding tax reclaim schemes in Denmark and Belgium.

Sunrise's controls were insufficient to identify and mitigate the risk of it being used to facilitate fraudulent trading and money laundering – breaching Principle 3 (management and control) of the FCA's Principles for Businesses. Sunrise also failed to exercise due skill, care and diligence in applying its policies and failed properly to assess, monitor and mitigate the financial crime risk in relation to the relevant clients and their trades – breaching principle 2 (skill, care and diligence).

CREDIT SUISSE FINE
The FCA fined Credit Suisse £147,190,276 for failures in its financial crime due diligence in respect of loans worth over US$1.3bn arranged for the Republic of Mozambique. The underlying loans, and a bond exchange, were “tainted by corruption”, according to an FCA press release.

The FCA's fine forms part of an approximately US$475m global resolution agreement with US and Swiss authorities.

Credit Suisse has also undertaken to forgive US$200m of debt to Mozambique as part of its settlement with the FCA.

FCA PROHIBITS IFA AND MORTGAGE ADVISER FOR FITNESS AND PROPRIETY FAILINGS
The FCA has prohibited financial adviser, Anthony George, from performing any financial services regulated activity on the grounds that his conduct demonstrates a lack of honesty and integrity and he is therefore not fit and proper. Between January 2015 and May 2019, George submitted false information to HMRC understating his income. Further, George provided the FCA with information he knew to be false on this matter during a compelled interview.

STEPHEN ALLEN SENTENCED TO 28 MONTHS IMPRISONMENT FOR FORGING A TRUST DEED
Stephen Allen was sentenced to 28 months imprisonment after pleading guilty to forging a trust deed to assist his client in minimising restitution owed to victims in relation to the operation of unauthorised collective investment schemes. The forged trust deed related to a London property worth more than £1m.

RICHARD FAITHFULL SENTENCED TO PRISON FOR MONEY LAUNDERING
Faithful was sentenced to five years and ten months imprisonment for laundering the proceeds (£2.5m) of at least seven professionally run overseas investment frauds, contrary to section 327 of the Proceeds of Crime Act 2002.

FCA PROHIBITS AND FINES OMAR HUSSEIN FOR PENSION SWITCHING ADVICE FAILINGS
The FCA has prohibited Hussein from working in financial services, and has fined him £116,000 for providing reckless and unsuitable pension switching advice. The fine would have been £165,797.38 but for early settlement. Hussein was a director and senior financial adviser at pension switching firm Consumer Wealth, which is now in liquidation. The Financial Services Compensation Scheme (FSCS) is investigating claims from Consumer Wealth customers.

LC&F COMPENSATION SCHEME AND DB PENSION ADVICE
The government announced on 3 November 2021 that it launched the compensation scheme for investors in London Capital & Finance.

Separately, the FCA has written to a further 950 defined benefit pension advice customers to tell them that they may be entitled to compensation. This takes the total to 3,591 for the year.

CHANGES TO THE APPOINTED REPRESENTATIVE REGIME
The appointed representative (AR) regime, already subject to thematic reviews by the FCA, came under further scrutiny following the Treasury Select Committee's report into the failure of Greensill Capital, with the Committee being concerned the regime was being used for purposes well beyond those originally intended. The Committee recommended that the FCA and HM Treasury consider reforms with a view to narrowing the regime's scope and reducing the opportunities for abuse.

As a result of this, on 3 December 2021 HM Treasury issued a Call for Evidence to obtain information on how the regime is used and how effectively it works in practice. This information will be used to inform whether legislative reform is required in addition to rule changes proposed by the FCA in its consultation paper Improving the appointed representatives regime (CP21/34) that was issued at the same time.

In the FCA's consultation, it proposes making certain changes to its rules to address the harm arising as a result of the regime, while keeping the benefits.

The FCA considers that harm most commonly occurs because principals do not perform sufficient due diligence before appointing an AR, and from inadequate oversight. The specific changes that the FCA proposes to make relate to reporting, and the responsibilities of principals.

In relation to reporting, the FCA proposes to require principals to:

• Provide the FCA with more information on their ARs and the ARs' businesses, including:
  • specific information on the activities the AR is permitted to undertake (for inclusion on the Financial Services Register by the FCA)
  • complaints data for their ARs
  • revenue information for their ARs.
• Report on significant changes to the information provided to the FCA
• Notify the FCA of an intention to begin regulatory hosting services before doing so.

Principals do not perform sufficient due diligence before appointing an AR In relation to the responsibilities of principals, the FCA proposes to:

• Clarify principals' responsibilities for their ARs
• Improve existing oversight requirements
• Give principals more details on the circumstances in which it may be necessary to terminate an AR relationship and, if so, how they should ensure that the relationship is wound down in an orderly way
• Require principals to annually review senior management at ARs and aspects of ARs' businesses and activities
• Require principals to complete an annual self-assessment of compliance with relevant rule and guidance for ARs.

The new changes will clearly impose additional obligations on principal firms, and require significant changes to the systems and controls through which principals oversee the activities of their ARs.

FUTURE REGULATORY FRAMEWORK (FRF) REVIEW: PROPOSALS FOR REFORM
On 9 November 2021 the government published a consultation on proposals for adapting the financial services regulatory framework to ensure it remains fit for the future and takes into account the UK's position outside of the EU.

The government proposes additional statutory secondary objectives for the PRA and FCA, requiring them to consider the implications for growth and international competitiveness of their regulations. Parliament and HM Treasury will also have increased oversight and scrutiny of the regulators.

FCA TO MOVE FASTER TO REMOVE UNUSED FIRM PERMISSIONS – ‘USE IT OR LOSE IT’
The Financial Services Act 2021 (amending the Financial Services and Markets Act 2000) gave the FCA an additional power to remove, vary or cancel a firm's permission/s where it appears to the FCA that the firm is not carrying out any regulated activity to which the permission relates. The FCA has consulted on amendments to its Handbook and Enforcement Guide which reflect this new power, and how the FCA intends to use it.

Incorrect or outdated permissions can give an incorrect impression to consumers that certain activities by a firm are regulated when they are not. Consumers are also at risk of criminals impersonating or cloning FCA authorised firms that no longer conduct regulated activities. The FCA's new powers are intended to combat these risks.

FCA CONSUMER INVESTMENTS STRATEGY AND CONSUMER INVESTMENTS DATA REVIEW
The FCA published its consumer investment strategy and consumer investments data review on 14 September 2021. The aim of the strategy is to give consumers the confidence to invest, with support from a high-quality, affordable advice market. The FCA anticipates this will lead to fewer people being scammed or persuaded to invest in products not suitable to their risk profile.

By 2025, the FCA will, according to its press release:

• Reduce by 20% the number of consumers who could benefit from investment earnings but are missing out. There are nearly 8.6 million consumers holding more than £10,000 of investible assets in cash.
• Halve the number of consumers who are investing in higher risk products that are not aligned to their needs. 6% of consumers increased their holdings of higher risk investments during the pandemic, with 45% of self-directed investors saying they did not realise the risks.
• Reduce the money consumers lose to investment scams perpetrated or facilitated by regulated firms. Consumers lost nearly £570m to investment fraud in 2020/21 – this has tripled since 2018.
• Stabilise the £833m compensation bill for the FSCS, and target a year-on-year reduction in the Life Distribution and Investment Intermediation (LDII) and investment provision funding classes from 2025 to 2030.

Measures the FCA will take to achieve its strategy include:

• Considering regulatory changes to help firms provide more assistance to consumers who want to invest in relatively straightforward products. It plans to consult on its proposals in Q1 2022 and implement them at the start of 2023.
• Launching a new £11m investment harm campaign to help consumers make better-informed decisions.
• Addressing misuse of the appointed representatives regime (see above).
• Strengthening the financial promotions regime in respect of classifying high-risk investments, further segmenting the high-risk market, and strengthening the requirements on firms when they approve financial promotions.

INVESTMENT IN LESS LIQUID / LONG-TERM ASSETS
The Productive Finance Working Group (co-chaired by the PRA and FCA) published A roadmap for increasing productive finance investment on 27 September 2021. This sets out 4 recommendations, supported by 13 specific actions. The recommendations include:

• Shifting the focus to long-term value.
• Building larger scale defined contribution schemes – the lack of scale can make it challenging for schemes to invest in less liquid assets.
• A new approach to liquidity management at a fund level: most DC schemes invest in daily-dealing funds, but a broader range of DC schemes should find ways to enable them to invest in less liquid assets.
• Widening investment in less liquid assets: recommending that the FCA consult on changing its rules for investment in illiquid assets through unit-linked funds, and reviewing the Long-Term Asset Fund (LTAF) distribution rules to facilitate wider distribution to appropriate retail clients.

Consequently, on 25 October 2021 the FCA finalised its rules creating the LTAF regime. These rules seek to provide a structure to address the liquidity mismatch between fund redemptions and the time it can take to sell underlying assets within the fund. Nikhil Rathi, chief executive of the FCA, stated, "The new rules create a Long-Term Asset Fund regime, a new FCA regulated fund that is designed specifically to help investment in assets including venture capital, private equity, private debt, real estate and infrastructure."

The FCA will consult on widening the distribution of LTAFs to certain retail investors in 2022.

VALUE FOR MONEY IN DEFINED CONTRIBUTION PENSION SCHEMES
On 4 October 2021 the FCA issued rules on how independent governance committees (ICGs) and governance advisory arrangements (GAAs) should compare the value of pension products and services and promote products/services with the best value to scheme members.

These rules provide a systematic and transparent framework for assessing value for money in pensions, and focus on defining "value for money" and three key elements – costs and charges, investment performance, and quality of services – that ICGs and GAAs should take into account when assessing value for money.

Further, in September, the FCA and TPR published a joint discussion paper on ‘Driving value for money in defined contribution pensions’. This focuses on developing a common framework for disclosures on the three key elements which make up "value for money" – making it easier for trustees, ICGs and GAAs to compare pension schemes.

FINANCIAL OMBUDSMAN SERVICE TEMPORARY CHANGES TO REPORTING OUTCOMES OF PROACTIVELY SETTLED COMPLAINTS

During the pandemic, FOS saw a substantial increase in requests for help. As part of a number of initiatives being considered to assist in faster complaint resolution, FOS sought views from stakeholders on temporary amendments to the reporting of firm-specific complaints outcome data, and whether this could act as an incentive to speed up resolution.

Following input, FOS has confirmed it will proceed with its proposals, specifically to:

• Record separately in its firm-specific data complaints proactively settled before the FOS has issued its opinion.
• Implement a cut-off date of 31 October 2021 for complaints to be in scope. Any complaint deemed chargeable by the FOS on or after 1 November 2021 will not be in scope.
• Revert to how it currently records the outcomes of complaints from 1 April 2022 onwards.

As part of the initial consultation, FOS proposed to communicate proactive settlement offers to customers when they received them from firms, explaining that the offer was the firm's alone, that FOS cannot confirm whether they think it is fair, and that the offer is optional. However, stakeholders expressed concerns that FOS presenting the offer to customers could impact the fairness of the process and could be perceived to carry FOS's endorsement.

In light of this, FOS has amended its approach such that it will review the fairness and reasonableness of any proactive offer communicated. Where the offer appears to be fair and reasonable, FOS will put it forward to the customer. Where FOS does not consider the offer obviously fair and reasonable, it will let both parties know.

FSCS and FOS

Robbie Constance, partner, DWF

FOS UPDATES GUIDANCE ON COMPENSATION FOR DISTRESS AND INCONVENIENCE
The primary point in the updated guidance is to understand the effect on each individual – including the overall impact in financial, practical and emotional terms. FOS also provides further information on the complaints it handles that result in making an award for distress or inconvenience.

FSCS LEVY FOR 2021/22 AND FORECAST FOR 2022/23
FSCS confirmed that the total levy for 2021/22 was £717 million, lower than the forecast of £833 million. The forecast or 2022/23 is £900 million – the increase caused partly by the previous year's fallout from failures of a number of SIPP providers rolling into 2022/23, increased complex pension claims, and increased compensation resulting from the failures of East West Insurance Company and Gefion Insurance A/S.

DWF, Editors, CISI Regulatory Update

This update is in the March 2022 print edition of The Review. 

Views expressed in this update are those of the DWF editors alone and do not necessarily represent the views of the CISI.