Does the Financial Services and Markets Bill 2022 secure the UK’s green finance agenda?

United KingdomScotland

The UK was described as “the best place in the world for green finance” by Rishi Sunak, the former UK Chancellor of the Exchequer, in his Mansion House speech last year.

In helping to secure the UK as a world leading net zero financial centre, the Financial Services and Markets Bill (the FSM Bill), a “once-in-a-generation opportunity” and the largest piece of financial services legislation for over two decades, has an arguably critical part to play.

We consider that the FSM Bill could go further with regards to the green agenda than as currently drafted. At present, it introduces a new regulatory principle for the FCA and the PRA, when discharging their general functions, to “have regard” to the need to contribute towards achieving compliance with section 1 of the Climate Change Act 2008.

Whilst this principle is a step forward in formalising the green agenda for the regulators, as HM Treasury itself has noted, “the regulators are not required to act to advance their regulatory principles; instead, they must take them into account when pursuing their statutory objectives”. Therefore, the regulators in discharging their duty would only need to demonstrate they had considered the principle, but could depart from it, with the statutory objectives overriding the principles in importance. This could limit the impact of the regulators pursuing the green finance agenda in their activities.

We consider there is merit in uplifting the drafted principle to be a secondary objective, with the same status of the FSM Bill’s proposed growth and international competitiveness secondary objective, which may:

  • Have greater impetus for the regulators to integrate net zero on a day-to-day basis in their range of activities across rule-making, supervision and enforcement.
  • Ensure the future of the UK regulatory regime has the green agenda embedded in it on a stronger legal footing as an objective, rather than as a principle. Under the FSM Bill, the regulators are intended to have an increasingly important role with drafting initial rule changes to the UK’s regulatory regime for consultation. With a climate-related net zero secondary objective there would be a stronger driver for the green finance agenda to be actively pursued by the regulators, as required with objectives, in their new rules proposed.
  • Ensure regulators would be held accountable for the transition to net zero with a statutory objective as the regulators report to Parliament on how that duty has been discharged. There is no such accountability or reporting with regulatory principles.
  • Provide more certainty to financial services providers that the regulators were focusing on climate-related matters throughout their actions, regardless of any political will at a given time which the regulators currently heavily lean on for their ESG Strategy.
  • Align with other international regulators, such as the AMF in France that already has a statutory objective linked to climate.

If there is an uplift of the consideration of climate change to objective status, then there would be the check and balance of the consultation made by the regulators in relation to the rules they are proposing. This should help significantly mitigate concerns of any negative unintended consequences of climate-focused financial services regulatory rules.

The FSM Bill was introduced into Parliament the day before the summer recess began, so there is now a wait until 5 September for the announcement of the new Prime Minister and for Parliamentary debate on the proposals to begin. Until that time the direction of travel for any updates and amendments to the FSM Bill, including with regards to climate change, is unknown but we continue to liaise with financial services entities for their feedback and expectations of the FSM Bill.