FCA clarifies priorities and plans greenwashing proposals for mid-2022

The UK’s Financial Conduct Authority (FCA), it seems, has had a challenging few months; with news of strike action among its employees sitting alongside criticisms that the regulator has not been clear in setting out its priorities.

Speaking at The Future of UK Financial Regulation Summit, FCA Executive Director, Sarah Pritchard, attempted to quell these concerns by setting out the FCA’s role and priorities for capital markets in the year ahead, as well as discussing plans under HM Treasury’s Future Regulatory Framework Review (FRF).

In her speech, Pritchard noted that it was important for the regulator to set out “clear expectations and outcomes against which progress can be measured”, reiterating CEO Nikhil Rathi’s 2021 commitment that the FCA will become a “more innovative, assertive, and adaptive regulator”. In order to do this, she added, the FCA must stay abreast of emerging issues within the industry and the wider world. In particular, it must focus on “changes driven by technology, innovation and climate change”.

Going one step further, Pritchard added that the FCA must go beyond just keeping abreast but must take these wider societal changes and reflect them in its broader regulatory agenda. This, it would appear, will be the FCA’s main focus for 2022.

The Future Regulatory Framework

HM Treasury’s consultation on the FRF was launched in November 2021 and closed on 9 February 2022. While the outcome of that consultation remains unknown for some time, the consultation broadly sought to transfer elements of current onshored legislation into the FCA’s Handbook. This provides an “opportunity”, according to Pritchard, to create a UK-market specific rulebook that continues to be “anchored by the high international standards which the UK has done so much to shape.”

The FCA currently has a primary duty to “promote market integrity, protect customers, and ensure competition in the interests of consumers”. Under the FRF proposals, the FCA would have a secondary objective – to operate in a way that boosts the long-term growth and international competitiveness of the UK economy. This is not growth at any cost, Pritchard highlights, but growth that operates in tandem with the commitment to meet a net-zero economy by 2050.

“FRF is a critical opportunity to adapt the regulatory system so that it continues to enhance the attractiveness of UK capital markets”, Pritchard comments, suggesting that we will see a flurry of regulatory activity around post-Brexit regulation once the consultation closes.

Capital markets and the FCA’s priorities

Over the past year the FCA has issued a number of consultations and changes for capital markets. In primary markets, for instance, Pritchard notes that steps have been taking to improve the UK listing regime. In particular, the FCA has introduced changes to free float, SPAC listings and dual class share structures. In secondary markets the FCA is supporting the government’s Wholesale Markets Review, which includes proposed changes to the UK commodities regime transparency.

Looking ahead, the FCA will be working with HMT on prospectus reform and a primary market effectiveness discussion paper. Following news that the rising cost of market data is an increasing concern, the FCA will also be conducting further work to examine the markets for trading data, benchmarks and credit rating data to understand the rising costs and a lack of competition in the area.

Environmental, Social, Governance (ESG)

The FCA anticipates that interest around sustainable finance and ESG will continue to grow, especially as countries transition to zero-carbon futures following COP26. With that in mind, the FCA continues to support “positive change” through formal rules and collaboration across governments, regulators, and countries. As well as collaboration, Prichard notes that the FCA will be doubling down on its innovation agenda in a bid to support the technology that underpins ESG integration.

It looks as though greenwashing will also be on the regulatory agenda for the FCA this year. Though Pritchard does not use the term directly, she notes that “firms need to ensure they have a credible strategy to integrate ESG criteria into their investment processes, including applying sufficient scrutiny to ‘green’ or ‘sustainable’ claims”. She adds that the FCA is working on proposals for ESG-related product labelling and disclosures, which will be published “by mid-year”.

CUBE comment

Sarah Pritchard’s speech appears to be a vessel in which the FCA wishes to clarify its regulatory agenda in the absence of clear priorities for 2022. While the priorities will be published “later in the year”, this could be seen as a blueprint – at least for capital markets.

With that in mind, it looks as thought 2022 will be the year in which Brexit-resultant changes come to the fore. There appears to have been a lull in regulatory activity for Brexit, which will undoubtedly pick up once the outcome of HM Treasury’s FRF consultation is known. Moreover, it looks as though ESG and sustainability will be high on the agenda too.

What is interesting is that Pritchard twice commits to working across borders to “inform our rules” around technology, innovation, climate change and ESG. CUBE’s latest report, Climate Change Risk: The Race to Regulation, found that the FCA is one of many regulators who are openly advocating for cross-border collaboration in these areas, but failing to genuinely act. CUBE’s data found that while a number of regulators have set out a desire to collaborate for climate change in particular, very few are actually considering cross-border groups or industry standards in their regulatory discussions. Because of this I am sceptical – or perhaps cautious – in accepting Pritchard’s commitment verbatim. It is welcome to hear a regulator speaking for a global approach to a global issue, but the proof of the pudding is in the eating.

As an aside, it is interesting that Pritchard takes the opportunity to talk at length about the FCA’s hiring plans for 2022. While this messaging might have historically pointed to the FCA ramping up for new regulatory and enforcement activity, I cannot help but be influenced by recent reports that FCA staff have voted in favour of strike action in light of proposed cuts to pay and conditions. It remains to be seen what the future holds for the FCA in 2022, but Sarah Pritchard’s speech offers some clarity at least.