FCA confirms final rules for new Consumer Duty

July 28, 2022

The FCA has published the final rules and guidance and accompanying non-Handbook guidance relating to the new Consumer Duty (the Duty).

While the nature and scope of the Duty remains largely unchanged in most areas, the final rules and guidance contain some significant changes and clarifications relating to how the Duty will apply in relation to distribution chains, closed books, wholesale markets and funds and asset managers and where firms provide products or services to occupational pension schemes. Helpfully, firms have been given more time to implement the changes needed to comply with the Duty.

From a disputes perspective, the FCA kept its powder dry on the possibility of a private right of action for breaches of any part of the Duty, saying that the possibility was being kept under review following the initial consultation. Financial services firms will welcome confirmation that no private right of action has been incorporated in the final rules. Firms will still be accountable for any breach of the Duty through the Financial Ombudsman Service framework (which is now subject to increased award limits).

For a more detailed analysis of the final rules and timeframe for compliance, please see our FSR Notes blog post.

FCA consults on the new Consumer Duty

December 8, 2021

Our Financial Services Regulatory colleagues have published a blog post on the FCA’s Consultation Paper 21/36 (CP 21/36) which includes proposed new rules and guidance setting out a Consumer Duty which it considers will “fundamentally shift the mindset of firms” and establish an appropriate level of care to consumers. The consultation is open until 15 February 2022 and the FCA expects to confirm any final rules by the end of July 2022.

The proposals from the FCA will add to the range of regulatory tools to address the poor customer outcomes it has identified in retail markets. They would therefore give the FCA a greater ability to hold firms and senior management to account if poor outcomes are identified in the future, and they are intended to raise industry standards by putting the emphasis on firms to get products and services right in the first place. Although the new proposed Consumer Duty will create a further burden on firms, the Handbook rules and guidance and non-Handbook guidance should provide greater clarity on the FCA’s expectations of the outcomes that should be achieved.

From a disputes perspective, firms are likely to welcome the fact that there will be no private right of action for breaches of any part of the Consumer Duty at this time. Firms will still be accountable for any breach of the Consumer Duty through the Financial Ombudsman Service framework, which has had a recent increase in the value of award limits within its jurisdiction. However, the consultation paper notes that the possibility of a private right of action is being kept under review.

For a more detailed analysis, please see our FSR Notes blog post.

High Court finds accountants’ investigation report not protected by litigation privilege and considers requirements for obtaining disclosure under the Disclosure Pilot

August 16, 2021

The High Court has granted an application by a claimant state for orders that the defendant bank disclose an accounting firm’s investigation report (and associated documents) originally withheld from disclosure on the grounds of litigation privilege, as well as to disclose certain categories of documents on a Model E or “train of enquiry” basis and make further enquiries for “known adverse documents”: State of Qatar v Banque Havilland SA and others [2021] EWHC 2172 (Comm).

The decision does not establish new principles relating to litigation privilege, but is noteworthy as it underlines the difficulties caused by the dominant purpose test in establishing a claim for litigation privilege where documents were arguably produced for a number of purposes, including to deal with enquiries from regulators, rather than solely for the purpose of anticipated litigation.

The decision, in particular, illustrates the difficulties for financial institutions seeking to withhold or redact an investigation report (and associated documents) on the basis of litigation privilege where there is little evidence at the time the report was commissioned that: (i) adversarial proceedings were, or were regarded by the bank to be, reasonably in contemplation; and (ii) the sole or dominant purpose in commissioning the report was conducting, settling or avoiding litigation. However, the decision also appears to indicate that where an investigation report is found to be protected by privilege and has been provided to a regulator on a limited waiver basis, the courts will robustly resist any claims that privilege has been waived.

The decision also highlights that, even if disclosure has initially been ordered on a Model D basis (i.e. narrow search-based disclosure of documents which support or adversely affect any party’s case, similar to old-style standard disclosure) under CPR PD 51U (the Disclosure Pilot), the court may later order Model E disclosure (i.e. wide search-based disclosure, to include documents which may lead to a train of inquiry to result in the identification of other documents for disclosure) if appropriate in respect of specific issues.

It also provides useful guidance as to the requirement that a party to civil proceedings has an obligation to undertake reasonable and proportionate checks to enquire for known adverse documents with the relevant custodians, even if they have left the company. In particular, the court highlighted that a check to see if a custodian is aware of any known adverse documents is not satisfied simply by asking whether he or she used a personal email account to send or receive work related emails or a personal device to store work related documents. It was therefore necessary that the bank make further inquiries of certain custodians, as they may have been aware of adverse documents stored elsewhere.

We consider the court’s decision in more detail below.

Background

In mid 2017 several Arab nations severed diplomatic ties and took a number of other measures against the State of Qatar (the claimant). Allegedly at the time of the diplomatic crisis, a presentation was prepared by a former employee of a Luxembourg bank (the Bank), which referred to certain trading and public relations strategies aimed at causing financial damage to the claimant (the Presentation). In late 2017, the contents of the Presentation were featured in an article published on 9 November 2017 on a non-profit media website under the headline: “Leaked Documents Expose Stunning Plan to Wage Financial War on Qatar – and Steal the World Cup”.

Following the publication of the Presentation, the Bank, recognising that this was a serious matter which could have significant regulatory and legal consequences, notified its regulators, the Commission de Surveillance du Secteur Financier (the CSSF) and the Financial Conduct Authority (FCA), that it was investigating the matter. The Bank also (through its Luxembourg lawyers) instructed PricewaterhouseCoopers (PwC) to carry out a forensic investigation and prepare a report (the Investigation Report), which was issued in June 2018 and shared with the CSSF and FCA under a limited waiver.

In April 2019, the claimant brought a claim against the Bank and its former employee (together, the defendants) alleging that they had conspired with several Saudi Arabian and United Arab Emirates banks to attack the Qatari economy by manipulating its financial markets.

In March 2020, at the first CMC, the court gave directions for disclosure which was to be given in accordance with the Disclosure Pilot. Subject to certain exceptions, in most cases disclosure was to be given by the defendants by reference to Model D.

In January 2021, all the parties to the proceedings gave disclosure. The claimant subsequently applied to the court seeking orders that the Bank: (i) disclose the Investigation Report, any drafts and supporting documents prepared in connection with the Investigation Report; (ii) carry out further searches and/or further reviews of documents, including a more extensive review of certain telephone recordings by reference to Model E, due to the facts that had come to light since the first CMC; and (iii) make further enquiries with each of its custodians as to whether they were aware of any known adverse documents, and if so, that it take steps to locate such documents.

High Court decision

The court found in favour of the claimant and granted the orders sought.

The key issues which are likely to be of broader interest to financial institutions are summarised below.

1) The claim to privilege in the Investigation Report

The Bank submitted that it had been entitled to withhold from production or redact the Investigation Report and associated documents on the grounds of litigation privilege, stating that they were prepared: (i) at the time when adversarial proceedings by the claimant and/or the Bank’s regulators were reasonably in contemplation; and (ii) for the sole purpose of collecting evidence and enabling legal advice to be given to the Bank in connection with those anticipated proceedings. The Bank also argued that any waiver of privilege in providing the Investigation Report to the CSSF and FCA was only a limited waiver as it had been given to them under certain professional secrecy restrictions or mutual assistance provisions, which maintained the privileged nature of the document.

In addressing the Bank’s submission, the court considered the principles applicable to litigation privilege and limited waiver.

Litigation privilege principles

As the starting point, the court noted that Three Rivers District Council v Governor and Company of the Bank of England (No 6) [2004] UKHL 48 provided an authoritative summary of the scope of and the requirements for a claim of litigation privilege:

“communications between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation are privileged when the following conditions are satisfied: (a) litigation must be in progress or in contemplation; (b) the communications must have been made for the sole or dominant purpose of conducting that litigation; (c) the litigation must be adversarial, not investigative or inquisitorial.”

The court then went on to highlight the scope of each of the requirements in further detail:

  • Litigation must be in progress or in contemplation. Where litigation is not actually in progress at the time the relevant communications are made or procured, it was necessary to demonstrate that litigation was reasonably contemplated or anticipated. The “mere possibility” of litigation did not suffice for litigation privilege, nor was it enough that there was “a distinct possibility that sooner or later someone might make a claim”; but this did not necessarily mean that there must be a greater than 50% chance of litigation (as per United States of America v Philip Morris Inc. [2004] EWCA Civ 330).
  • Communication made for sole or dominant purpose of conducting litigation. What matters may not be the state of mind of the author of the communication but of the party that commissioned or procured it (as per Guinness Peat Properties Ltd v Fitzroy Robinson Partnership [1987] 1 WLR 1027). Although ordinarily the privileged status of a communication falls to be assessed at the time the communication is made, if what matters is the instigating party’s purpose, the best guide to his or her purpose may be to consider matters at the point in time when the relevant communication is procured, recognising, of course, that a party’s purpose may change. The court also highlighted that a communication made for the sole or dominant purpose of “conducting litigation” also embraces communications made for the dominant purpose of obtaining information or advice in order to settle or avoid litigation (as per WH Holding Limited v E20 Stadium LLP [2018] EWCA Civ 2652).
  • Litigation must be adversarial. It was important to consider whether particular types of proceedings are properly regarded as adversarial or as investigative or inquisitive. In the court’s view, what was required for litigation privilege is a contemplation of adversarial litigation, not an investigative or inquisitive procedure. However, the court commented that what may start as an investigation may develop into adversarial proceedings (as per Tesco Stores Ltd v Office of Fair Trading [2012] CAT 6).

Limited waiver principles

The court highlighted that where documents are shown or provided to regulators on a limited waiver basis, and despite the existence of legal rights or duties on the part of the regulators to use, act on or even publish the documents pursuant to their regulatory powers, there will be no waiver of privilege where there were express confidentiality and non-waiver agreements between a bank and a regulator (as per Property Alliance Group Ltd v Royal Bank of Scotland plc [2015] EWHC 1557 (Ch)).

However, the court noted that the absence of an express non-waiver agreement between a bank and a regulator is not necessarily fatal. The court underlined that the question of whether there has been a general or only limited waiver requires the court to have regard to all the circumstances, including what was impliedly communicated between the parties and what each must or ought reasonably to have understood (as per Citic Pacific Ltd v Secretary for Justice [2012] 2 HKLRD 701).

Application of litigation privilege and limited waiver principles to the present case

The court held that the Investigation Report was not protected by litigation privilege and must be produced for inspection. Litigation privilege also did not apply to any drafts of the Investigation Report and associated documents prepared in connection with it (to the extent that they were in the Bank’s control). Similarly any documents withheld or redacted on the basis that they referred to the Investigation Report or PwC’s engagement were also required to be produced for inspection.

The court commented that at the time the Bank instructed PwC there was little evidence that the CSSF’s position was, or was regarded by the Bank, as hostile or that adversarial regulatory proceedings were, or were regarded by the Bank to be, reasonably in contemplation. There was also little evidence of the anticipation of adversarial proceedings from the FCA. The court noted that the CSSF’s letter of 13 November 2017 asked a number of questions about the Intercept Article and the Presentation, but it was not particularly aggressive or adversarial and it made no threat of proceedings. There was also nothing in the Bank’s subsequent communications with the CSSF that suggested that the CSSF was adopting an adversarial posture towards the Bank. In the court’s view, it did not consider that the CSSF’s involvement went beyond the investigative stage, nor was there anything to suggest that it would do so. Matters could not be judged with hindsight but the position remained that no proceedings were ever commenced against, and no sanctions were ever imposed on, the Bank by the CSSF. The court also highlighted that the Bank had no contact with the FCA prior to 13 November 2017, and subsequent communications fell short of an anticipation of adversarial proceedings. There was also no evidence of any communication between the claimant and the Bank, or any intimation or fear of a claim by the claimant against the Bank, prior to 13 November 2017 when PwC was instructed.

The court said that, even if it were the case that the Bank reasonably contemplated adversarial litigation as at 13 November 2017 when PwC was instructed or at some later stage prior to June 2018, it was also not satisfied that PwC’s instruction, or the Bank’s request that PwC should produce a report, were for the dominant purpose of the anticipated litigation. In the court’s view, the two most prominent purposes behind PwC’s instruction were to: (i) find the facts, including how a copy of the Presentation had been obtained from the Bank’s files; and (ii) to satisfy the CSSF and put the Bank in a position where it could answer the CSSF’s questions.

Finally, the court said that, as it had found that the Investigation Report was not privileged, it was unnecessary to deal with the argument that privilege in the Investigation Report had been waived by the provision of the report to the CSSF and ultimately to the FCA. However, the court did underline that it would have required a good deal of persuading that the circumstances in which the document was provided to the regulators meant that privilege in the report had been waived generally.

2) Model E Disclosure

The claimant submitted that, whilst Model D may have been appropriate as at the first CMC, in the events that had happened since, a Model E review was now necessary and appropriate.

The court held that Model E disclosure was appropriate on a limited basis.

The court commented that it had not been satisfied at the first CMC that the evidence justified the application to the defendants’ disclosure of Model E to any of the issues for disclosure. Model E was intended to be used only in exceptional cases.

However, in light of the further material now available and what it revealed, it was appropriate to revisit this issue. In the court’s view, a Model E review limited to this particular category of documents (i.e. the telephone recordings) and to a particular issue for disclosure was reasonable and proportionate, and also necessary for the just disposal of the proceedings.

3) Adverse documents

The Bank submitted that the checks it had done or had agreed to do in relation to adverse documents were sufficient. It would contact disclosure custodians with a view to determining whether they used personal email accounts to send or receive work related communications, and whether they used personal devices to store work related documents.

The Disclosure Pilot principles

In its analysis of this issue, the court highlighted that the key principles from the Disclosure Pilot and related authorities to note in relation to known adverse documents were as follows:

  • All forms of extended disclosure include known adverse documents (as per paragraph 8.3 of the Disclosure Pilot).
  • Known adverse documents are defined as “documents (other than privileged documents) that a party is actually aware (without undertaking any further search for documents than it has already undertaken or caused to be undertaken) both (a) are or were previously within its control and (b) are adverse” (as per paragraph 2.8 of the Disclosure Pilot).
  • The circumstances in which a corporate entity, such as the Bank, is regarded as aware of known adverse documents will be when: “any person with accountability or responsibility within the company or organisation for the events or the circumstances which are the subject of the case, or for the conduct of the proceedings, is aware. For this purpose it is also necessary to take reasonable steps to check the position with any person who has had such accountability or responsibility but who has since left the company or organisation” (as per paragraph 2.9 of the Disclosure Pilot).
  • The Disclosure Pilot provisions impose an obligation upon a party to undertake reasonable and proportionate checks to see if it has, or has had, known adverse documents, and if so to undertake reasonable and proportionate steps to locate them. These include checks with persons with accountability or responsibility for relevant events even if they have left the company (as per Castle Water Limited v Thames Water Utilities Limited [2020] EWHC 1374 (TCC)).

Application of Disclosure Pilot principles to the present case

The court ordered the Bank to make further enquiries of its custodians about the existence of known adverse documents. The court commented that if an individual is a person with accountability or responsibility within the meaning of paragraph 2.9 of the Disclosure Pilot, then a check to see if he or she is aware of known adverse documents is not satisfied simply by asking whether he or she used a personal email account to send or receive work related emails or a personal device to store work related documents. In the court’s view, the individual custodians may have still been aware of adverse documents stored elsewhere.

Julian Copeman
Julian Copeman
Partner
+44 20 7466 2168
Maura McIntosh
Maura McIntosh
Professional Support Consultant
+44 20 7466 2608
Benedicte Perowne
Benedicte Perowne
Senior Associate
+44 20 7466 2026
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7466 2529
Elina Kyselchuk
Elina Kyselchuk
Associate
+44 20 7466 6448

Duty of Care – countdown to the much anticipated FCA consultation

May 11, 2021

Our Financial Services Regulatory colleagues have published a blog post considering the latest developments in the possible introduction of a new “duty of care” owed by authorised persons to consumers in carrying out regulated activities under FSMA.

In particular, the article considers the legislative and regulatory developments since the FCA first published a Feedback Statement in 2019, summarising responses to its July 2018 Discussion Paper on the proposed introduction of a “duty of care”. It also looks at the timetable set out at section 29 of the Financial Services Act 2021, which requires the FCA to carry out a further consultation about whether it should make general rules providing that authorised persons owe a “duty of care” to consumers.

The new FCA consultation is expected to be published later this month, although it seems unlikely that this will suggest a new statutory duty of care.

For a more detailed analysis, please see our FSR Notes blog post.

Climate-related disclosures for issuers: further steps towards mandatory requirements?

March 26, 2021

In November 2020, the UK Joint Government Regulator TCFD Taskforce published its “roadmap towards mandatory climate-related disclosures”, which set out a vision for the next five years. As an initial step towards fulfilling that vision, in January 2021, the new Listing Rule 9.8.6(8) (LR) came into force. The LR requires premium-listed issuers, in their periodic reporting, to publish disclosures in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations on a ‘comply or explain’ basis. However, the Financial Conduct Authority (FCA) has recognised that some issuers may need more time to deal with modelling, analytical, metric or data-based challenges.

This flexibility in the new LR’s compliance basis reflects the challenges and evolving experiences with working on data and metrics in the context of climate risk. Key stakeholders should now be redoubling their efforts to meet the challenges and with the promise of further TCFD guidance on data and metrics later this year and the recent launch of a Department for Business, Energy and Industrial Strategy (BEIS) consultation seeking views on proposals to mandate climate-related financial disclosures in line with the TCFD recommendations from 6 April 2022, the step to a mandatory climate-related disclosure regime may be closer than initially envisaged.

In light of the ever-evolving regulatory landscape, it is important issuers continue to monitor the impact of any changes to their disclosure requirements and to consider what, if any, litigation risks may arise (particularly, under s90 FSMA, s90A FSMA, or in common law or equity) in connection with their climate-related disclosures.

The key developments on data and metrics, as well as the key proposals from the BEIS consultation, are examined below. We also consider what these developments and proposals mean for issuers in terms of regulatory reporting requirements.

Climate Financial Risk Forum

Following its fifth quarterly meeting in November 2020, the Climate Financial Risk Forum (CFRF) noted the importance of progress in the development and understanding of climate data and metrics. In light of this, the CFRF announced that all of its working groups will focus on climate data and metrics in the next phase of work. This is a shift from the CFRF’s previous approach of allocating different focus areas to its working groups.

TCFD Financial Metrics Consultation

The TCFD has this month published a summary of the responses to its ‘Forward-looking Financial Metrics’ Consultation, which was conducted between October 2020 and January 2021. The consultation aimed to collect feedback on decision-useful, forward-looking metrics to be disclosed by financial institutions. The TCFD solicited feedback on specific metrics and views on the shift to, and usefulness of, forward-looking metrics more broadly.

46% of the 209 respondents were financial services firms from around the world, and over half of the respondents were EMEA based, with just over a quarter from North America.

These findings will inform the work on metrics and targets which the TCFD plans to tackle in 2021. The TCFD announced that it will publish broader, additional draft guidance for market review and consideration later this year.

BEIS Consultation

BEIS launched a consultation this month on mandating climate-related disclosures by publicly quoted companies, large private companies and LLPs. The consultation proposes that, for financial periods starting on or after 6 April 2022, certain UK companies with more than 500 employees (including premium-listed companies) be required to report climate-related financial disclosures in the non-financial information statement which forms part of the Strategic Report. Such disclosures are required to be in line with the four overarching pillars of the TCFD recommendations (Governance, Strategy, Risk Management, Metrics & Targets).

BEIS has stated that the proposed rules are intended to be complementary to the FCA’s requirement that premium-listed companies make disclosures in line with the four pillars and 11 recommended disclosures of the TCFD. BEIS proposes to introduce the new rules via secondary legislation which will amend the Companies Act 2006.

The Financial Reporting Council will be responsible for monitoring and enforcing the proposed rules, while the FCA will supervise and enforce disclosures within the scope of the LR.

The consultation is open until 5 May 2021.

Regulatory reporting requirements

The new TCFD guidance, once published, is likely to feed into the LR requirements. The new LR expressly refers to the TCFD Guidance on Risk Management Integration and Disclosure and the TCFD Guidance on Scenario Analysis for Non-Financial Companies published in October 2020. Additionally, the FCA’s Policy Statement dated December 2020, which accompanied the new LR, stated that the FCA would be considering how best to include references to any further TCFD guidance in the FCA Handbook Guidance. This is likely to be achieved through the use of the FCA Quarterly Consultation Papers.

The new LR is not a mandatory disclosure requirement and the new rules proposed by the BEIS consultation are yet to have legislative force. However, we are getting a clearer picture of the likely disclosure regime in the UK and in particular: the regulatory guidance around the compliance basis; the clear anticipated milestones this year relating to data and metrics guidance and best practice; and the forthcoming Consultation Paper by the FCA on the scope expansion (including compliance basis) of the new LR. That picture suggests the transition to mandatory climate-related disclosure requirements may well be a small step, rather than a giant leap.

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

Supreme Court hands down judgment in FCA’s Covid-19 Business Interruption Test Case

January 15, 2021

The Supreme Court has today handed down judgment in the Covid-19 Business Interruption insurance test case of The Financial Conduct Authority v Arch and Others. Herbert Smith Freehills acted for the FCA who advanced the claim for policyholders.

The Supreme Court unanimously dismissed Insurers’ appeals and allowed all four of the FCA’s appeals (in two cases on a qualified basis), bringing positive news to policyholders across the country that have suffered business interruption losses as a result of the Covid-19 pandemic.

At first instance the FCA had been successful on many of the issues, and now the Supreme Court has substantially allowed the FCA’s appeal on the issues it chose to appeal. The practical effect is that all of the insuring clauses which were in issue on the appeal will provide cover for the business interruption caused by Covid-19.

For more information, please see this post on our Insurance Notes blog.

Climate-related disclosures for issuers: FCA publishes final rules

January 11, 2021

The Financial Conduct Authority (FCA) has published a Policy Statement (PS20/17) and final rules and guidance in relation to climate-related financial disclosures for UK premium listed companies.

Companies will be required to include a statement in their annual financial report which sets out whether their disclosures are consistent with the Task Force on Climate-related Financial Disclosures (TCFD) June 2017 recommendations, and to explain if they have not done so. The rule will apply for accounting periods beginning on or after 1 January 2021.

As well as some additional guidance, the FCA has made only one material change to the rules consulted upon in March 2020 (CP20/03) with the final LR 9.8.6(8)(b)(ii)(C) R requiring non-compliant companies to set out details of how and when they plan to be able to make TCFD-aligned disclosures in the future.

With regard to monitoring compliance with the new listing rule, the FCA confirmed in its Policy Statement that it will provide further information on its supervisory approach to the new rule in a Primary Market Bulletin later in 2021.

In light of this latest regulatory development, issuers may also want to consider what, if any, litigation risks may arise in connection with climate-related disclosures (and indeed other sustainability-related disclosures which are made in response to these regulatory developments). There may be an increased risk of litigation under s90 FSMA, s90A FSMA, or in common law or equity. This was considered in greater detail in our recent Journal of International Banking & Financial Law article (published in October 2020) in which we also examined the existing climate-related disclosure requirements, the impact of the FCA’s proposals on issuers and how issuers can mitigate against such litigation risks.

Our article can be found here: Climate-related disclosures: the new frontier?

For a more detailed analysis of the FCA’s Policy Statement, please see our Corporate Notes blog post.

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

Climate-related disclosures for issuers: next steps from UK financial regulators outlined

November 25, 2020

This month, there have been some significant regulatory announcements in relation to climate-related disclosures. These announcements are a result of the increasing focus on climate change and sustainability risks across governments, regulators and industry and a continued move towards corporate compliance with the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations.

While not launching new developments or heralding the unexpected, these announcements are noteworthy for issuers as they mark a change in tone from the UK regulators regarding climate-related disclosures. Previously, the Financial Conduct Authority (FCA) and Prudential Regulation Authority took a cooperative and directional view, in recognising that issuers’ capabilities were continuingly developing in some areas which might limit their ability to model and report scenarios in the manner recommended by the TCFD. With the latest announcements, it seems increasingly likely that there will now be a shift away from voluntary climate-related disclosures towards mandatory TCFD aligned disclosures across the UK economy.

Key announcements

Recent key announcements include:

  • HM Treasury publishing the Interim Report of the UK’s Joint Government-Regulator TCFD Taskforce (the Taskforce) on the implementation of the TCFD recommendations and a roadmap towards mandatory climate-related disclosures;
  • the Governor of the Bank of England’s (BoE) speech reaffirming what the BoE is doing to ensure that the UK financial system plays its part in tackling climate change;
  • the FCA’s speech on rising to the climate challenge; and
  • the Financial Reporting Council’s (FRC) publication of its Thematic Review on climate-related risk.

Summary of key announcements

These announcements highlight the UK’s financial regulators’ strategy for improving and developing climate-related disclosures. The key points from these announcements include:

Taskforce

  • The Taskforce’s Interim Report highlighted the UK government’s commitment to introduce mandatory climate-related financial reporting, with a “significant portion” in place by 2023, and mandatory requirements across the UK economy by 2025. The Interim Report considered regulatory steps around tackling climate change, and also identified proposed legislative changes from the Department for Business, Energy and Industrial Strategy (which is intending to consult in the first half of 2021 on changes to the Companies Act 2006 to insert requirements around the TCFD recommendations on compliant disclosures in the Strategic Report of companies’ Annual Reports and Accounts, including large private companies registered in the UK).
  • The Taskforce strongly supports the International Financial Reporting Standards Foundation’s proposal to create a new global Sustainability Standards Board on the basis that internationally agreed standards will help to achieve consistent and comparable reporting on environmental and, social and governance (ESG) matters.

BoE

  • The BoE reaffirmed its commitment to driving forward the business world’s response to tackling climate change and reiterated the importance of data and disclosure in firms’ attempts to manage climate risk.
  • The BoE announced that the delayed climate risk stress test (its biennial exploratory scenario dubbed “Climate BES”) for the financial services and insurance sectors would be carried out in June 2021.
  • While the Climate BES will not be used by the BoE to size firms’ capital buffers, the BoE has put down the marker that it expects firms to be assessing the impact of climate change on their capital position over the coming year and will be reviewing firms’ approaches in years to follow.
  • The BoE also directed financial firms and their clients to the TCFD recommendations to encourage focus and drive decision-making, pointing to the benefits that the BoE has itself felt from reporting this year in line with the TCFD recommendations.

FCA

  • The FCA confirmed that from 1 January 2021 new rules will be added to the Listing Rules requiring premium-listed commercial company issuers to report in line with the TCFD recommendations. As anticipated by last year’s Feedback Statement, the new rule will be introduced on a ‘comply or explain’ basis. The general expectation is that companies will comply, with expected allowances for modelling, analytical or data based challenges. It is expected that these allowances would be limited in scope. The Taskforce’s Interim Report notes that the FCA is considering providing guidance on the “limited circumstances” where firms could explain rather than comply. A full policy statement and confirmation of the final rules are expected before the end of 2020.
  • The FCA is also intending to consult on “TCFD-aligned disclosure” by asset managers and life insurers. These disclosures would be aimed at “clients” and “end-investors”, rather than shareholders in the firm itself. The consultation is intended for the first half of 2021 and is stated that “there will be interactions with related international initiatives, including those that derive from the EU’s Sustainable Finance Action Plan” (it should be noted that such standards cover much more than climate disclosures). Current indications are that these disclosure standards would come into force in 2022.
  • The FCA is co-chairing a workstream on disclosures under IOSCO’s Sustainable Finance Task Force, with the aim of developing more detailed climate and sustainability reporting standards and promoting consistency across industry.

FRC

  • The FRC emphasised that all entities (boards, companies, auditors, professional advisers, investors and regulators) needed to “do more” to integrate the impact of climate change into their decision making. One of the FRC’s ongoing workstreams is investigating developing investor expectations and better practice reporting under the TCFD recommendations.

Regulatory reporting requirements and litigation risks for issuers

The recent announcements are a reminder by the UK’s financial regulators that issuers must look beyond the current Covid-19 crisis to the oncoming climate emergency. It is clear that not engaging is not an option, even as the regulatory environment continues to change. Issuers and firms will therefore want to consider the impact of those disclosure requirements/suggestions across the board, from investor interactions to regulatory reporting to meeting supervisory expectations.

As the sands shift, issuers may also want to consider what, if any, litigation risk may arise in connection with climate-related disclosures (and indeed other sustainability related disclosures that are brought out from the shadows with these regulatory developments). There may be an increased risk of litigation under s90 FSMA, s90A FSMA, or in common law or equity. This was considered in greater detail in our recent Journal of International Banking & Financial Law article (published in October 2020) where we also examined the existing climate-related disclosure requirements, the impact of the FCA’s proposals on issuers and how issuers can mitigate against such litigation risks.

Our article can be found here: Climate-related disclosures: the new frontier?

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nish Dissanayake
Nish Dissanayake
Partner
+44 20 7466 2365
Nihar Lovell
Nihar Lovell
Senior Associate
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

Climate-related disclosures: the new frontier?

October 9, 2020

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the Financial Conduct Authority (FCA)’s proposals for regulating climate-related disclosures and the litigation risks which may arise for issuers from such proposals.

Climate change has been part of the political and regulatory discourse for years. However, it is an issue which is gaining increasing prominence on the global stage. Over a thousand companies now support the Task Force on Climate-related Financial Disclosures (TCFD)’s recommendations, while shareholder activism in the climate arena is stretching beyond Greenpeace’s proposed resolutions at energy companies’ AGMs. Against this backdrop, both the EU and the UK have advocated for adapting their financial systems to address climate risks. Whilst the European Central Bank and Bank of England are addressing the risks from climate change in their financial systems, attention has also turned to how companies themselves can be affected by climate change, both in terms of risk assessment and management, and in terms of investor and market-facing disclosures. The current legal framework regarding issuer disclosure already provides some requirements for issuers to disclose climate-related risks in certain circumstances. However, the existing disclosure requirements fall short when it comes to consistent and meaningful disclosures. There are therefore systemic and policy drivers to increase transparency, reporting and potential regulation in this space.

The FCA has noted that voluntary adoption of the TCFD’s recommendations has been increasing. However, based on the feedback that the FCA received in response to a 2018 Discussion Paper, the FCA considers that there is evidence to support the case for it to intervene to accelerate such progress.

In our article, we examine the existing disclosure requirements for issuers, the FCA’s new proposals for regulating climate-related disclosures, the FCA’s reasons behind the proposals, how issuers will be impacted by the proposed regulatory change, the litigation risks which may arise for issuers and how issuers can mitigate against such litigation risks.

This article can be found here: Climate-related disclosures: the new frontier? This article first appeared in the October 2020 edition of JIBFL.

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Senior Associate
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

Judgment handed down in FCA’s COVID-19 business interruption insurance test case

September 15, 2020

The High Court has today handed down judgment in the COVID-19 Business Interruption insurance test case of The Financial Conduct Authority v Arch and Others. Herbert Smith Freehills represented the FCA (who was advancing the claim for policyholders) in the case, which considered 21 lead sample wordings from eight insurers. Following expedited proceedings, the judgment brings highly-anticipated guidance on the proper operation of cover under certain non-damage business interruption insurance extensions.

While different conclusions were reached in respect of each wording, the court found in favour of the FCA on the majority of the key issues, in particular in respect of coverage triggers under most disease and ‘hybrid’ clauses, certain denial of access/public authority clauses, as well as causation and ‘trends’ clauses. The judgment should therefore bring welcome news for a significant number of the thousands of policyholders impacted by COVID-related business interruption losses.

For more information see this post on our Insurance Notes blog.