Funds Legal Update | Sanctions, case law on the financial promotion restriction and ESG

We take a look at the Financial Conduct Authority's (FCA) reminder to firms on sanctions and at a recent Court of Appeal judgment clarifying what is required for a breach of the financial promotion restriction. In Europe, the picture around the EU Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation continues to develop

UK news

FCA updates webpage on financial sanctions and clarifies notification obligations

On 12 April 2022, the FCA published an updated version of its webpage on financial sanctions.

Under Principle 11, firms should notify the FCA without delay if they (or their appointed representatives or agents) are subject to financial sanctions, whether directly or indirectly. This includes sanctions listed by the Office of Financial Sanctions Implementation or any other country or jurisdiction. Dual-regulated firms should also notify the Prudential Regulation Authority.

A firm could be subject to sanctions in several ways, including if it:

• is directly named on a sanctions list;
• is indirectly sanctioned via a beneficial owner, controller or shareholder; or
• has directors or employees who are named on a sanctions list.

Firms should notify the FCA in line with SUP 15 requirements through the usual reporting mechanisms, providing sufficient information, including the country that has imposed the sanctions, the relevant sanctions regime, when the measures came into force and who is affected. Firms should also include any relevant general or specific licences and their analysis of how the sanctions affect their activities.

Court of Appeal clarifies extent of 'knowing concern' for breach of financial promotion restriction

On 25 March 2022, the Court of Appeal clarified the extent of a director's knowledge of their company's unlawful conduct that would amount to being "knowingly concerned" in the company's contravention of section 21 of the Financial Services and Markets Act 2000 (FSMA), the financial promotion restriction (FCA v Ferreira [2022] EWCA Civ 397).

The court has allowed an appeal by a former company director, Karen Ferreira, against a finding of liability against her under section 382 FSMA and an order to pay restitution to the respondent, the FCA, for the benefit of the company's investors. Section 382 empowers the court to order payment of compensation by a person who has contravened a relevant requirement under FSMA or has been "knowingly concerned in the contravention" of such a requirement.

The company, Our Price Records, raised funds from retail investors by promoting its shares, but never traded and went into administration. It was undisputed that the company had contravened section 21(1) FSMA – two share offerings were promoted through unauthorised marketing agents who telephoned members of the public. The appellant claimed she believed the company's communications with potential investors had been approved by the company's accountants, but the accountants were not in fact authorised to do so.

The appeal judgment clarifies that, for an offence to have been committed, the director must have knowledge of factual circumstances that prevented a potentially relevant disapplication of the prohibition from operating – in this case, the fact that the financial promotion had not been approved by an authorised person.

Contrary to the finding at first instance, it is not enough that the person had knowledge of the facts giving rise to the contravention – in this case, that the communications were made and in the course of business.

(Case: FCA v Ferreira [2022] EWCA Civ 397 (25 March 2022). See the full judgment here and the FCA's update here.)

ESG developments 

ESMA speech outlines sustainability priorities for the asset management industry

On 30 March 2022, the European Securities and Markets Authority (ESMA) published a speech by Natasha Cazenave, executive director at the EU supervisory authority, on priorities for the asset management industry, which focuses on sustainable finance and systemic risk.

Demand for ESG products remains strong, with investors increasing their allocation to this sector. Firms are actively preparing for the detailed rules set out in the SFDR implementing measures, which will apply from 1 January 2023. ESMA continues to discuss these disclosure requirements with EU regulators to support consistent interpretation, and intends to publish guidance and Q&As on stakeholder questions (for example, on scope, definitions, and interactions between different pieces of legislation). The European supervisory authorities are also preparing a review of the indicators for principal adverse impacts, a key part of SFDR disclosures.

ESMA is aware that, although SFDR is primarily a transparency regulation, fund managers and investors are increasingly treating the disclosure categories as a form of product classification – more investment funds are marketing themselves as either Article 8 or Article 9 SFDR. As a result, some article 8 funds are being "called out" for having less ambitious environmental or social characteristics. ESMA needs to consider criteria to ensure that investors who are looking for sustainability features are offered products matching their preferences.

On the EU Taxonomy Regulation, the European supervisory authorities want to ensure investors are not exposed to potentially misleading disclosures about the level of ambition of firms' or products' taxonomy alignment. ESMA hopes the new rules could be seen as a positive opportunity for fund managers to contribute to the transition to net zero.

SFDR: Commission adopts RTS on content and presentation of sustainability disclosures

On 6 April 2022, the European Commission adopted a Delegated Regulation supplementing the SFDR with regard to regulatory technical standards (RTS) specifying the details of the content and presentation of information in relation to the "do no significant harm" principle, sustainability indicators and adverse sustainability impacts, and the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports. The Regulation is scheduled to apply from 1 January 2023.

The Commission has also published the following annexes to the draft Delegated Regulation:

• Annex 1: Template principal adverse sustainability impacts statement.
• Annex 2 and Annex 3: Template pre-contractual disclosure for specified financial products.
• Annex 4: Aggregate statistical data.
• Annex 5: Template periodic disclosure for specified financial products.

The RTS, which apply to firms disclosing sustainability-related information under SFDR, specify the exact content, methodology and presentation of the information to be disclosed to improve its quality and comparability. The RTS are also intended to help assess the sustainability performance of products.

The ESAs published joint reports on the draft RTS in February 2021 and October 2021. In light of how interconnected the two sets of draft RTS are, and to help ensure the rules are consistent, the Commission has bundled the 13 standards into a single legal act.

EU Platform on Sustainable Finance reports on technical screening criteria for remaining environmental objectives of EU taxonomy

On 30 March 2022, the EU Platform on Sustainable Finance (PSF) published a report setting out recommendations to the Commission on the technical screening criteria (TSC) for the four remaining environmental objectives under the EU Taxonomy Regulation.

A separate annex sets out recommendations for TSC for the following environmental objectives:

• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems

The annex includes recommendations for TSC for climate change mitigation and climate change adaptation, although the TSC for those objectives are set out in the Taxonomy Climate Delegated Act and in a separate proposal for a Complementary Climate Delegated Act for oil and natural gas activities.

The main body of the report summarises the PSF's methodology in drawing up its recommendations on the TSC. It also includes recommendations to improve the design of the taxonomy and the TSC. The PSF also recommends reviewing the existing "do no significant harm" criteria in the Taxonomy Climate Delegated Act.

The PSF is continuing to work on the environmental TSC for several activities, and plans to release the TSC for those activities in May 2022.