UK Finance Response to FCA ESG Ratings Consultation: Supporting the Framework, Pressing on Proportionality and EU Divergence

Credit: Baker Institute

The banking sector backs FCA regulation of ESG ratings but wants rules that work for global providers and prevent the regime from creating market concentration in a sector with few large players.

Context:

UK Finance submitted a formal response to FCA Consultation Paper CP25/34, ESG Ratings: Proposed Approach to Regulation, ahead of the 31 March 2026 deadline. CP25/34 proposes bringing ESG ratings providers within the FCA regulatory perimeter for the first time, following the making of the Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025. Final rules are expected Q4 2026; the authorisation gateway opens June 2027; the regime goes live 29 June 2028.

The context for UK Finance's response is the significant role that ESG ratings play in the investment and risk management processes of its member banks. Banks use ESG ratings from providers such as MSCI, Sustainalytics, and ISS to inform: credit decisions (assessing borrower sustainability risk); investment portfolio ESG screening; regulatory reporting under ISSB S1 and S2 (once mandatory from January 2027); stewardship and engagement activities; and internal sustainability governance obligations under the PRA's SS5/25 climate supervisory statement.

UK Finance's overarching position is supportive of regulation; the lack of a dedicated regulatory framework has created well-documented problems, including opaque methodologies, inconsistent data quality, and unmanaged conflicts of interest. Approximately 55% of ESG ratings users (per the FCA's own research) are concerned about how ratings are developed. Regulations that improve transparency, governance, and conflict management are in the interests of banks' users.

Rules and Guidelines:

The proposed regime applies baseline FCA rules (Threshold Conditions, PRIN, SYSC, SM&CR, GEN) plus tailored requirements on: (i) transparency, disclosure of methodologies, data sources, and the basis for rating outcomes; (ii) systems and controls, data quality standards, model validation, and documentation; (iii) governance, senior management accountability for rating integrity; (iv) conflicts of interest, mandatory information barriers and regular conflicts reporting to senior management; and (v) stakeholder engagement, accessible complaint processes and rated entity appeals mechanisms.

ESG ratings providers will need FCA authorisation from June 2028. Overseas providers serving UK clients must assess whether their activities fall within the regulated perimeter. The FCA has designed the regime to be proportionate to smaller providers, with recognition provisions for providers already authorised in comparable regimes (EU, US, Japan) to ease the UK application burden.

The Consumer Duty does not apply to ESG ratings activity. There is no bespoke prudential regime; firms must maintain adequate financial resources and wind-down plans. The FCA does not propose extending the Financial Ombudsman Service's jurisdiction to ESG ratings complaints.

Businesses Affected:

UK Finance's key points:

• First, proportionality, the response pressed for meaningful proportionality provisions for smaller ESG ratings providers, warning that overly prescriptive baseline rules could drive market consolidation toward the three or four largest global providers, reducing competition and innovation.

• Second, EU divergence, the UK regime goes live in June 2028, two years after the EU ESG Ratings Regulation (in force July 2026). UK Finance called for active management of divergence to avoid UK firms facing dual compliance burdens where UK and EU requirements differ on methodology disclosure, conflict-of-interest structures, and authorisation procedures.

• Third, data accuracy liability, UK Finance cautioned against the regime creating an expectation that providers guarantee the accuracy of underlying issuer data (which providers cannot independently verify), arguing that obligations should focus on systems and processes rather than output accuracy.

• Fourth, transition period, UK Finance supported the six-month pre-gateway support period (January–June 2027) but pressed for early FCA guidance on registration requirements to give providers sufficient preparation time.

Next Steps:

• Banks and asset managers that are significant users of ESG ratings, who will benefit from improved transparency and governance under the new regime, and who should participate in the FCA's engagement process during the pre-gateway period.

• ESG ratings providers currently serving UK clients, who must determine whether they require FCA authorisation, conduct a perimeter analysis, and begin authorisation preparation.

• Compliance, risk management, and ESG governance teams, who must update their ESG ratings due diligence frameworks to reflect the new regulatory accountability for providers.

• Legal and regulatory advisory teams supporting ESG ratings providers through the June 2027 authorisation gateway process.

Source | UK Finance | Response to FCA ESG Ratings