Image credit: REUTERS/Mike Blake
In our Year in Review, we look at some of the key themes of the last 12 months according to our experts at Practical Law and look ahead to 2022. Part 1 examined issues around employment and data protection and privacy, and in Part 2 we turn to financial services and compliance.
Part 2 – Financial services and compliance
2021 was a busy year in terms of developing trends for businesses and their legal advisers to grapple with, although legislative reforms did not move through as quickly as expected in some areas, suggesting that the pace may pick up next year.
Financial services
In the past 12 months, financial services regulators have been very active in the ESG (environmental, social, and governance) space. For example, the FCA has published an ESG strategy, which builds on its ongoing focus on culture. Both the FCA and the PRA are looking not just at policy (that is, the creation of new rules) but supervision (that is, how businesses are judged against those rules). Environmental concerns have been a strong area of focus, as the remit of both regulators has been adjusted in recognition of the potentially serious economic and financial consequences of climate change.
In terms of the bigger policy picture, “The government wants to be a leader in green finance and make the UK a net zero financial centre,” says Helen D’Ardenne, Deputy Director of the Practical Law Financial Services team. “It’s very important that corporates and financial institutions are aware of the ‘Roadmap’ the government published in October 2021, which sets out how this will be achieved.”
Sustainability disclosures are another hot topic now that the recommendations set out by the Taskforce on Climate-related Financial Disclosures (TCFD) on how corporates should disclose climate-related financial information are being made mandatory in the UK. In that vein, interest in supply chain due diligence requirements and reporting is also on the increase. And early details have emerged on how some companies are going to have to report on their ‘climate transition plans’, where they publish details about the targets being used to mitigate climate risk and the plans to meet those targets. There will be high expectations for the content of these transition plans and significant investor pressure on companies to make net zero commitments.
Looking ahead
The government’s ‘Roadmap’ proposes creating a green taxonomy as a common language for talking about environmental issues and defining green practices. Something similar has proved controversial in the EU, so D’Ardenne urges companies and legal experts to engage in providing feedback on the UK green taxonomy as it develops, particularly around what it will mean for businesses and investors in practice.
Building on disclosure requirements, transparency will be a standout theme. The FCA is creating an ESG sourcebook within its rules and is developing a labelling system to clarify the sustainability of investments. Asset managers, life insurers, and pension providers will need to start preparing for the TCFD rules to come into force. And the Sustainability Disclosure Regime (SDR) will see listed issuers, asset managers, and asset owners start disclosing the impact of climate risks and opportunities. 2022 could also be the year when we see high profile enforcement action and litigation around greenwashing. But it could also usher in new technology solutions to ESG problems.
Practical Law’s practice area editors have contemplated the main developments expected to affect legal practitioners in England and Wales in 2022 and beyond; Practical Law: What to expect in 2022 across practice areas
Compliance
The role of compliance within organisations is broadening, with an increasing emphasis not just on following the rules but on behaving in a demonstrably ethical way. This is due partly to the rise of ESG—all elements of which (not just the ‘E’) are being treated with equal importance. ESG is now top of investors’ agendas, and businesses are looking both at how they address it and how they can be transparent about that. Good governance is the starting point, allowing them to implement good environmental and social policies which can then be translated by employees and legal advisers into sound sustainable practices organisation-wide and turned into clauses in commercial transactions.
Over the past year, many companies have been auditing their codes of conduct to ensure they promote ethical behaviour. And they are re-assessing their risk appetites, looking beyond financial rewards and resilience toward the risks of not fully incorporating ESG strategy right across the business, including suppliers (and suppliers’ suppliers). Numerous recent shocks have put the robustness and sustainability of the entire supply chain in the spotlight. Suppliers’ ethics matter too. Now more than ever, businesses need to ensure the credentials of all links in the chain align with their values and expectations.
Looking ahead
All of this matters to customers and investors, but also to staff—particularly the younger generation who are most engaged in ESG issues. So it will be critical to recruitment and retention.
While 2021 was reactive, hampering efforts to strengthen ethics and culture, Chloe Shanley, Director of the global Compliance Team at Practical Law predicts that 2022 will be characterised by proactivity and agility on the compliance front. Companies and their legal advisers should stay particularly on the alert for shock events in the form of cybersecurity and ransomware attacks in the months ahead.
After a year packed with challenges, 2022 is shaping up to be just as demanding and complex. To hear our sector specialists explore the trends and implications in more depth, watch our Recent Webinar.
Practical Law’s practice area editors have contemplated the main developments expected to affect legal practitioners in England and Wales in 2022 and beyond; Practical Law: What to expect in 2022 across practice areas
