The government has announced that the Competition and Markets Authority (CMA) will be given game-changing new powers to deal with consumer protection breaches. BCL partner Richard Reichman explores why those changes are being implemented and what it means for greenwashing.
What has been announced?
In an earlier greenwashing article we commented that businesses were likely to face a stronger CMA in the future and this will soon become reality. The announcement on 20 April 2022, following a consultation which began in July 2021, was made to little fanfare. However, it marks a significant bolstering of the CMA's powers and an important enforcement risk for businesses.
What are the key changes?
Along with wider competition and consumer policy reforms, the government will legislate to allow the CMA to decide itself whether consumer protection law has been breached, without the need to prosecute or take civil action, in an approach analogous to its existing competition law powers.
Under the new powers, the CMA will be able to:
- Fine businesses up to 10% of global turnover for consumer protection breaches – it will have the power to impose direct civil penalties using an administrative model. These penalties will be turnover-based or fixed monetary penalties. The CMA will also be able to impose a penalty of up to £300,000 on individuals.
- Direct that an infringement of consumer protection laws comes to an end – this power is anticipated to be analogous to an Enforcement Order, an existing civil court remedy.
- Direct that redress is awarded to consumers or secure positive compliance action – this power is anticipated to be analogous to Enhanced Consumer Measures, an existing civil court remedy.
- Issue fines for breaches of directions and undertakings – it will have the power to direct compliance and impose turnover-based or fixed monetary penalties where an undertaking given by an enforcement subject, or a direction imposed by the CMA, has been breached without a reasonable excuse. Penalties of up to 5% of a business's annual global turnover may be imposed, with an additional daily penalty of 5% daily global turnover while non-compliance continues. Penalties of up to £150,000, with an additional daily penalty of up to £15,000 while non-compliance continues, will apply for individuals.
- Issue fines for failure to comply with information requests – it will have the power to direct compliance and impose turnover-based or fixed monetary penalties where a person, without a reasonable excuse, fails to comply with an information request, has concealed, falsified or destroyed evidence, or has provided false or misleading information. Penalties may be imposed of up to 1% of a business's annual global turnover, with an additional daily penalty of 5% daily global turnover while non-compliance continues. Penalties of up to £30,000, with an additional daily penalty of up to £15,000 while non-compliance continues, will apply for individuals.
Why are the new powers being implemented?
The new powers are expected to make enforcement action quicker, simpler, and more cost-effective for the CMA.
Allowing a regulator to be judge, jury and executioner clearly gives rise to concerns regarding impartiality and fairness. There will be an important route of appeal to the High Court from CMA first instance direct enforcement decisions which can directly or indirectly lead to a civil penalties. Other decisions unrelated to civil penalties will require challenge by way of judicial review.
The CMA will retain the ability to take enforcement action in the criminal or civil courts.
Although sector regulators with consumer enforcement powers and local authority trading standards departments are not being granted the new administrative powers (the position may change in the future for sector regulators), the powers of the civil courts will be enhanced. Sector regulators and local authority trading standards departments will be able to apply to the civil courts to impose monetary penalties at equivalent levels to the CMA's new powers.
Will this apply to greenwashing?
The CMA views greenwashing as a strategic priority; a prevalent problem damaging crucial sustainability and climate goals which is at the intersection of consumer and competition regulation. It has the potential to cause harm to consumers, businesses and the environment. The CMA is currently carrying out a review of the fashion industry, a circa £54 billion a year industry said to be responsible for between 2% and 8% of global carbon emissions. Will the new powers help the CMA to challenge misleading environmental claims?
The government has stated that the CMA's new powers will apply to the “core pieces of consumer protection legislation”. Depending on the circumstances, greenwashing may be a criminal offence under the Consumer Protection from Unfair Trading Regulations 2008 (the “2008 Regulations”) which prohibit certain unfair commercial practices. It appears almost certain that the 2008 Regulations will be in scope.
Will these changes go far enough to prevent greenwashing?
Whilst the new powers are expected to be a significant risk for businesses, including those said to be making misleading green claims, the CMA would like the government to go further to address potential enforcement problems and assist in achieving crucial sustainability and net zero goals, for example by considering:
- Creating standardised definitions of commonly-used environmental terms – the CMA acknowledge that it is “potentially difficult for businesses to know if their use of certain terms or the omission of information on the environmental impact of a product will mislead (or be likely to mislead) consumers in any given case”. Standardisation of terminology is a complex but crucial challenge across the ESG field.
- Confirming an express positive obligation to disclose environmental information to consumers – in the light of the new enforcement risk, there is concern that greenwashing turns to whitewashing and environmental claims disappear.
- Improving supply chain transparency and due diligence – suppliers making environmental claims could be required to disclose the evidence which substantiates the claim down the supply chain. Due diligence requirements could also be imposed. The EU has already recently adopted a proposal to implement a new Directive on corporate sustainability due diligence.
- Addressing potential deficiencies with the 2008
Regulations
- Greenwashing could be added to the list of banned practices which are in all circumstances unfair to avoid the current need to prove that the unfair practice caused or was likely to cause the average consumer to take a transactional decision they would not have taken otherwise. The EU is currently considering a proposal dated 30th March 2022 to amend the Unfair Commercial Practices Directive (the EU law from which the 2008 Regulations derived) in this way. The EU proposal also suggests expanding the list of product characteristics about which a trader cannot mislead consumers to cover the “environmental or social impact, as well as the durability and reparability”.
- Creating freestanding legislation to criminalise misleading and unsubstantiated green claims.
- Enhanced consumer measures for environmental harm – amending the provisions on enhanced consumer measures to allow a Court (and, presumably in the future, the CMA directly) to order ‘payment of redress in the collective interest' where there is wider environmental harm.
We expect to see more ESG regulation, including regarding greenwashing, and enforcement action in the future. The CMA's new powers will likely be one part of the enforcement toolkit which will focus minds on the veracity and substantiation of environmental claims.
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