Smarter regulation: deregulating the Commercial Agents (Council Directive) Regulations 1993

The Commercial Agents (Council Directive) Regulations 1993 (the “Regulations”) cover contractual arrangements between businesses and their commercial agents. Applying to agency arrangements, introducers, marketing agents, purchasing agents and sales agents, their purpose is to provide consistent protection for agents.

An assimilated piece of EU law, on 16 May 2024, the Department for Business and Trade published a consultation proposing to abolish the Regulations.

The Government stated that deregulation would simplify the legislative framework in the UK and allow businesses to enter arrangements more easily. It would also reduce court time spent on interpreting the Regulations.

The Government is requesting opinions on its proposals from businesses, trade associations, commercial agents, representative bodies and consumers, and the consultation includes a prescribed set of questions which it is asking participants to review and respond to.

Any responses to the proposal must be submitted by 11.59pm on 11 July 2024. The Regulatory Policy Committee will independently review and assess the options before reaching a decision on the proposed policy.

How could it impact your business?

The Regulations have been in force since 1 January 1994. They include provisions to protect commercial agents, including default provisions for the calculation of renumeration and an agent’s entitlement to commission during the agreement, as well as compensation payments upon termination (this may include payments for any goodwill generated for the principal during the agreement by developing the distribution network). Furthermore, where a notice of termination is given by the principal, the Regulations impose a minimum notice period relating to the length of service.

The proposed legislation would prevent the Regulations from applying to new agency arrangements, allowing businesses and agents to individually negotiate contractual terms within the context of agency and the common law principles developed by the English courts.

The proposed deregulation will not impact existing arrangements entered into before the effective date of the new or amended legislation; these will continue to be governed by the Regulations until they end.

With the upcoming general election on Thursday 4 July 2024 there is uncertainty as to whether the Government’s latest proposals will be adopted at all and, if so, the likely timescale for any proposed changes to become law.

However, if the Government’s proposals are implemented this could have a significant impact on agents and businesses going forward.

What steps should you take?

If a business is currently considering entering into a new agency arrangement, these will remain subject to the Regulations and the mandatory obligations on commission and termination payments will continue.

It is possible to delay entering into an agency agreement until there is certainty that the regulations will not apply, however, there is no guaranteed timeline for when (or indeed if) these proposals will be adopted.

Given the state of flux, parties may want to consider implementing interim arrangements such as a short-fixed term contract or building in suitable termination rights if new legislation is enacted.

Packaging and Packaging Waste Regulations

As part of the European Green Deal and Circular Economy Action Plan, the new Packaging and Packaging Waste Regulation (PPWR) is expected to be fully adopted at the end of Q2 2024, laying down rules that govern the entire lifecycle of packaging and packaging materials supporting the transition to a circular economy. One notable aim of the PPWR is to make all packaging placed on the EU internal market reusable or recyclable by 2030. To achieve this goal, the PPWR introduces EU-wide rules on packaging including rules relating to excessive packaging.

How could it impact your business?

Any packaged product that could make its way onto the European market will have to comply with the new regulation once it comes into force. Considering that the EU accounts for approximately 15% of global GDP, and 14% of international trade, the packaging regulations are likely to have a significant extraterritorial reach, capturing not just those businesses established in the EU, but those that supply to the EU either directly or indirectly.

The PPWR sets the minimum standard for packaging, namely that all packaging must be recyclable, contain a minimum recycled content in plastic packaging, or be reusable. Additionally, the text sets a maximum limit on the use of chemicals in packaging, notably polyfluorinated alkyl substances (PFAs) and lead, cadmium, mercury, which could have an adverse impact on human health.

The regulation applies to manufacturers, suppliers of packaging or packaging materials, importers, distributors, and fulfilment service providers (including e-commerce operators), with the potential to increase the scope in the future.

Failure to comply with the PPWR carries the risk of both penalties and fines, the rates of which are yet to be determined.

What steps should you take?

Once through the legislative process, the PPWR is expected to come into force imminently with an 18-month transition period. In the first instance, businesses should identify whether their packaging/packaging materials activities are likely to be caught by the PPWR, considering whether they are manufacturers, distributors or importers, as individual operators in the supply chain are subject to different obligations.

For manufacturers of packaging, it is an opportune time to review the conformity assessments required and consider documenting lifecycle assessments of packaging to demonstrate compliance with the PPWR where such packaging will be placed in the EU. Manufacturers should bear in mind that any transition to cardboard, paper, wood pulp etc. will also have to comply with the relevant phytosanitary regulations.

If caught, businesses should review their supply chain arrangements, including re-use, collection/return and deposit return, refill, and any related policies to ensure compliance with their obligations under the PPWR, including communicating those clearly to end-users.

For businesses with distribution networks, now is a suitable time to review distribution agreements to determine if the agreements contain obligations and responsibilities for dealing with packaging and packaging waste (if not provided for already) and bring these agreements in line with the PPWR.

IoD consultation on new voluntary code of conduct for Directors

The Institute of Directors has published a consultation paper on a new voluntary code of conduct for directors in public, private and not for profit entities across all sectors. The deadline for feedback is 16 August 2024.

How does it impact your business?

Although the code is voluntary so as not to bind directors, it provides a useful and practical toolkit aimed at helping directors to enhance their decision-making and maintain integrity, which will ultimately help to improve wider trust in the business.

The code is structured around 6 key principles, each of which is underpinned by a series of undertakings. These principles are as follows:

• Leading by example: Demonstrating exemplary standards of behaviour in personal conduct and decision-making.

• Integrity: Acting with honesty, adhering to strong ethical values, and doing the right thing.

• Transparency: Communicating, acting and making decisions openly, honestly and clearly.

• Accountability: Taking personal responsibility for actions and their consequences.

• Fairness: Treating people equitably, without discrimination or bias.

• Responsible business: Integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts.

What steps should you take?

In the first instance, organisations should review the new code of conduct for directors, outlined in the consultation paper, and consider providing feedback before the 16 August deadline to ensure their views are considered in the final version.

Although voluntary, businesses may also wish to and consider incorporating some of the codes to promote better governance and integrity among their directors, potentially improving decision-making processes.

The role of privacy in ESG

Sustainability reporting is fast becoming an expectation from customers, regulators, and stakeholders alike. The environmental, social and governance (ESG) landscape is complex and rapidly evolving, with FY 2024 marking the first year that reporting will be required on the Corporate Sustainability Reporting Directive, and the year that the Corporate Sustainability Due Diligence Directive will be introduced. This new regulation from Europe, alongside increased investor scrutiny, are driving change.

Organisations are quickly learning that ESG reporting can be a challenge, but also an opportunity to showcase values and an accelerator of business transformation. What is less well known is the fundamental role that privacy plays in meeting objectives and building trust.

How could it impact your business?

Privacy is a key business risk and one of the next big pillars of ESG. It is foundational from a reporting perspective; without strong governance, organisations will not be able to convince stakeholders or users that they are holding data compliantly. Compliance with core GDPR principles, such as data minimisation, together with responsible retention and storage practices, directly addresses environmental concerns. The use of automation in handling data subject requests and incident management furthers green objectives by reducing waste. Giving people control of their personal data through transparent notices and consent management tools, as well as ensuring robust security measures, evidences commitment to social concerns.

Ultimately, good privacy practice empowers businesses to confidently navigate and showcase their commitment to meeting ESG aims. Prioritising accountability responsibilities under existing privacy legislation enables businesses to elevate their reporting beyond pure compliance, to building and leveraging stakeholder confidence.

What steps should you take?

Privacy and data leaders need a voice at Executive tables; they must be included in the ESG conversation to educate leadership and compliance colleagues regarding the good that privacy does for ESG.

Organisations should be assessing the maturity of their privacy programmes, to consider what data can be leveraged and what improvements made to embed their business’ commitment to the planet and society. Records, such as data maps and ROPAs should be updated to pose key questions from an ESG perspective, e.g. how will an activity look through a social lens? Procurement and acquisition Due Diligence questionnaires and RFPs issued to vendors should foreground privacy and information security considerations. Risk assessments such as DPIAs should encompass sustainability objectives. All design practices should be socially and environmentally responsible.

Ultimately, privacy (by default and design) and ESG are powerful allies. Businesses will not only meet mandatory requirements but gain competitive advantage through appreciating and harnessing the synergies between the two.

DMCC Deep Dive: Digital Regulation

Since the inception of the digital age, law-making bodies and regulators alike have grappled with the regulation of digital markets, struggling to keep pace with the ever-evolving nature of the technology giants which now tower over the industry. In November 2022 the European Union took the first step in revolutionising the regulation of big tech with the introduction of the Digital Markets Act (DMA), establishing, for the first time, an ex-ante regime for the regulation of big tech.

As stated in our May Horizon scanning, last month the UK responded with its own digital markets regulatory framework in the form of the Digital Markets, Competition and Consumers Act (DMCC). This received royal assent on 24 May.

What Changes are made by the Act?

The Digital Markets chapters of the DMCC introduce an ex-ante regime for the regulation of digital markets, most notably through the regulation of organisations designated by the CMA as having “Strategic Market Status” (SMS). Where an organisation is designated as having SMS, a door is opened to a world of increased regulation that touches almost every activity of the designated entity, from acquisition strategy to data protection, to strategic alliances.

How Does the Act Define a Digital Activity?

The Act defines takes a broad-brush approach to defining digital activities, and includes within the definition the following, irrespective of whether provided for a fee, or free of charge:

1. The provision of services by way of the internet (including via application);

2. The provision of digital content; and

3. Any other activity pursuant to the provision of services or digital content.

What does Strategic Market Status mean?

The Act sets out a number of conditions which must be satisfied in order for an organisation to be designated as SMS:

• Turnover: The firm must satisfy the relevant turnover thresholds (either £25 billion annual group worldwide turnover, or an annual UK turnover of £1 billion).

• Substantial and Entrenched Market Power: In order to assess this criterion the CMA indicates that it will engage in a future gazing exercise; examining how the market may look in five years absent the designation. Whilst the CMA will consider market shares in its assessment, there is no indication that (unlike with the current Chapter II enforcement regime) a threshold of 40% or higher must be met to establish substantial and entrenched market power. The CMA sets out that it will consider, non-exhaustively: profitability levels; the number of competitors in the market; levels of customer switching; data advantages; integration into wider ecosystems, and ownership of intellectual property rights.

• Position of Strategic Significance: The CMA will examine the size and scale of the undertakings' position in relation to digital activities. Again, the scope of what may be considered under this criterion is particularly broad and may include the number of users of the digital activity, the volume of data processed by the SMS firm in relation to the activity, whether the firms power in one area of the market may allow it to expand its dominance into other areas of the market – leveraging its existing influence, and even the ability of the firm to influence or control the behaviour of other undertakings.

• Link to the United Kingdom: Finally, the SMS firm must have a link to the United Kingdom. The link to the UK is defined in the broadest sense and even those which do not directly supply to the UK but provide a key input or component for a good or service that is ultimately supplied in the UK, may be subject to the Act.

Where the CMA has reasonable grounds for believing that an undertaking may meet the requirements to be designated an SMS, it may launch an investigation. On conclusion of the investigation, the CMA will issue a notice setting out its reasons for designating (or not designating, as the case may be) the undertaking as SMS. Each designation will last for an initial period of 5 years, with the possibility to extend or revoke.

The CMA has indicated that it anticipates it will carry out between 3 and 4 SMS investigations per year. Whilst, rather predictably, it is suggested that the undertakings that will first be subject to investigation will include those that have already been designated as gatekeepers under the DMA (including Alphabet, Meta, Apple, ByteDance, Amazon, Microsoft and Booking.com), the CMA has indicated that it is willing to go further than the European Commission, and will welcome the views from third parties as to which undertakings should be considered for investigation.

How could it impact your business?

Obligations on SMS Firms

Once a firm has received the SMS designation, it is welcomed into the world of digital markets regulation, and the heightened regulatory scrutiny this brings. The DMCC confers onto the CMA a plethora of powers relating to SMS firms:

1. Conduct requirements: Where a firm is designated as SMS, the CMA has broad jurisdiction to impose conduct requirements (CRs) on the firm, designed to protect consumers and/or the wider competitive process. In its draft guidance the CMA sets out the permitted type of CRs, a list of 13 liberally-drafted permitted purposes, including in relation to fair data use, self-preferencing, fair trading practices and interoperability. The sweeping nature of the permitted CRs in practice gives the CMA broad remit to implement CRs on virtually any aspect of a digital activity. The CMA has extended its enthusiasm for third party submissions to welcome opinions from third parties on the contents of CRs. Once the CRs have been decided, the CMA will publish the CRs online, available for any interested party to view. Where a breach is suspected or identified, the DMCC confers powers on the CMA to conduct investigations. The CMA has the power to impose enforcement orders on the undertaking and can pursue various remedies, including fines of up to 10% group worldwide turnover. Interestingly, the Act also makes provision for the CMA to intervene in contracts by way of final offer mechanism where it feels that the undertaking has breached an enforcement order in failing to agree fair and reasonable terms with a third party and grants the CMA investigation powers in relation to the agreement. The CMA then has the power to facilitate renegotiation between the parties, which presents a novel opportunity for parties entering into contracts with SMS firms.

2. Pro-Competition Interventions: In addition to CRs, the DMCC bestows upon the CMA the ability to make pro-competition interventions (PCIs) in relation to the digital activities of SMS firms. Under the PCI regime, the CMA can intervene and impose requirements on SMS firms where it feels that factors exist in the market which are causing an adverse effect on competition. The requirements that the CMA has the power to impose are wide-ranging and include both behavioural remedies (such as requiring the firm to give access to data or intellectual property) and structural remedies (including divestment).

3. Mergers and Acquisitions: For mergers and joint ventures involving designated firms and exceeding a value of £25 million, the DMCC introduces specific notification requirements, which may trigger a CMA investigation into the merger or joint venture.

What does this mean for firms who are at risk of being designated?

For risk and compliance teams at SMS firms, the Act introduces a new era, bringing with it an increased cost and a need for specialist advisors to assist with the complexities of the new digital regulation regime. As those firms which have previously entered into behavioural undertakings with the CMA will warn, reporting on the requirements alone can be a significant compliance task. Firms should fully and wholeheartedly engage with the CMA to feed into the designation process and engage in an ongoing collaborative strategy with the CMA, establishing open lines of communication. Designated firms will find themselves having to make far more frequent contact with the CMA, so it will pay to develop a constructive, collaborative dialogue.

From a financial perspective, the Act makes provision for a levy to be imposed on SMS designated firms to cover the CMAs operating costs in the field of digital regulation. Introducing another cost of doing business for designated firms. The CMA indicated in its draft guidance that it will soon produce draft levy rules for consultation which will provide some indication of the necessary contribution.

What does this mean for firms who have a business relationship with SMS firms?

For those firms who are not at risk of being designated as SMS, the DMCC presents a sea of opportunities. The law will necessitate more egalitarian practices from SMS firms, allowing customers and competitors alike a fairer marketplace. Moreover, the DMCC presents firms with the opportunity to engage with the regulator, and feedback on the behaviour of SMS firms, or even make submissions as to which firms should be designated, and how they should be regulated. Where firms believe that SMS firms are not abiding by the requirements placed on them by the CMA, firms are presented with another option for enforcement of competition, one which is faster and more economically viable than the current court enforcement options.

Family-friendly rights: Paternity bereavement leave.

The Paternity Leave (Bereavement) Act 2024 received Royal Assent on 24 May 2024, just before Parliament was dissolved at the end of May, as part of the last-minute rush to push through key legislation, before July’s General Election.

How could it impact your business?

There is currently no date set for this legislation coming into effect. However, when it does, it will:

• provide that, in the sad case where a mother has died in the first year after birth/adoption, fathers/partners will no longer need the standard 26 weeks’ continuous weeks’ service to qualify for bereavement leave. The leave will be available to all bereaved fathers/partners irrespective of service; and

•  probably provide for paternity leave to be extended to up to 52 weeks (rather than the usual two weeks) in such circumstances.

It is worth bearing in mind that separate legislation may now follow to give enhanced redundancy protection to employees when they return to work following such extended leave, in a similar way to the enhanced redundancy protection for new mothers returning from maternity leave, extending the right to be offered suitable alternative employment in a redundancy situation, for up to 18 months after the expected week of childbirth.

What steps should you take?

Although it is hoped this change may only ever need to be relied upon by the smallest number of individuals, employers will need to update family leave policies to refer to this enhanced right, once we have clarification of the date for it to come into effect.

Labour’s Election Manifesto: An overhaul of employment laws?

The three main political parties unveiled their election manifestos in the second week of June, in anticipation of the 2024 General Election.

Labour previously published its updated “Plan to Make Work Pay: Delivering A New Deal for Working People” (“New Deal”) in May 2024, making various pledges to reform employment laws. The May New Deal built on (and in some ways, ‘watered down’) commitments made in an earlier Green Paper, on which we reported in our February horizon Scanning update. Labour’s Manifesto includes a statement to implement its latest New Deal Plan in full.

Should Labour be elected, it promises to achieve this by introducing legislation within the first 100 days. Their document also contains a statement that businesses and unions will be fully consulted before any new laws are passed. So, whilst it may be possible to act on some of the proposals quicker than others, it is expected that key legislation could only be produced (at best) in draft form, within that initial tight timescale of 100 days.

How could it impact your business?

Key employment pledges specifically mentioned in Labour’s Manifesto include:

• Banning ‘exploitative’ zero-hours contracts. Previously there was no mention of the word ‘exploitative’, so potentially this will no longer be an absolute ban;

• Ending fire and re-hire. Again, there no reference in the wording to an absolute ban and instead there is to be a strengthened Code of Practice, to replace the one recently introduced by the current Government;

• Commitment to introduce ‘day one’ rights, in relation to:

  • Unfair dismissal

  • Statutory sick pay

  • Parental leave;

• Creating a Single Enforcement Body to ensure employment rights are upheld;

• Strengthening ‘the collective voice of workers.’ This appears to be reference to the New Deal commitments to: making collective consultation requirements dependent on the number of redundancies in the business as a whole, rather than at each ‘establishment’; and other union-related changes, including to add reference in a new employee’s Section 1 Statement of Terms to the right to join a trade union);

• Changing the National Minimum Wage to ensure it accounts for the cost of living and also to remove the current age-related bands, so that all adults would be entitled to the same minimum wage.

• A commitment to introduce a Race Equality Act, to ensure the right to equal pay for Black, Asian, and other ethnic minority people;

• Introducing disability and ethnicity pay gap reporting for large employers, to mirror gender pay gap reporting.

Key pledges from the latest New Deal Plan, which, although not specifically mentioned in the Manifesto, are intended to be implemented as part of the Manifesto’s 100 day-commitment:

• Time-limits for claimants to bring any type of Tribunal claim to be extended to six months (increase from the current time-limit of 3 months for most claims);

• Consultation on a move to a single status of ‘worker’, so that everyone other than the genuinely self-employed would be afforded the same rights and protections currently enjoyed by employees. This new reference to ‘consultation’ seems to be a belated acknowledgement that this is a complex area, which will need careful consideration before any such changes could be made.

• Rights for employees to have a contract which reflects the hours they actually work, based on a twelve-week reference period;

• A requirement for businesses with more than 250 employees to have a menopause action plan;

• Introduction of a right to have a conversation with an employer about ‘switching off’ and preventing contact by their employer outside of working hours. This appears to be a dilution of the original proposed ‘right to disconnect’;

• Making flexible working the default, except where it is not ‘reasonably feasible’ – presumably requiring employers to have a good reason to reject it.

An original proposal to remove the cap on the compensation that can be awarded for successful unfair dismissal claims seems to have been dropped.

What steps should you take?

All of these proposals will depend on the outcome of the election on 4 July 2024 and, even in the event that the polls are correct and Labour is elected, such radical changes will take time to fully implement.

The plan to abolish the current two-year qualifying service requirement for unfair dismissal claims is certainly one of the more headline-grabbing commitments and could potentially have a significant impact on businesses. Labour has previously confirmed, however, that employers will be able to use contractual probationary periods with ‘fair and transparent rules and processes’, to assess new recruits and potentially fairly dismiss within the probationary period.

The devil will be in the detail of the legislation, but once more detail of the proposals emerge, employers may need to be ready to update employment contracts, with particular focus on probationary periods, which may need to be extended, to provide as much flexibility as possible. Processes for monitoring and assessing new recruits within probationary periods may also need to be reviewed, and managers’ skills refreshed, to ensure they make proper use of this potentially limited period within which to determine if someone is suitable for longer-term employment.

Disability discrimination: Rentokil Initial UK v Miller

The Employment Appeal Tribunal has recently clarified the law around reasonable adjustments, deciding that it can be a reasonable adjustment to offer a disabled employee a trial period in an alternative role, particularly where the employer may otherwise be considering an ill-health dismissal. (Rentokil Initial UK v Miller).

Mr Miller was employed as a Pest-Control Technician. When he was unable to carry out his role due to his debilitating condition of multiple-sclerosis, diagnosed just a year into his role, Rentokil made various adjustments to his role, to try to help him continue working.

Before eventually dismissing Mr Miller on grounds of ill-health, Rentokil explored the possibility of alternative roles. He was unsuccessful in his application for a Service Administrator role, on the basis that the recruiting manager decided he did not have the necessary skills and experience, including the fact that he had performed poorly at the interview and he had limited knowledge of using Excel.

The EAT agreed with the Tribunal’s original judgment in that, although Mr Miller’s performance in the application process may have given Rentokil cause for concern, these concerns could potentially have been addressed by offering him the chance of a trial period in the alternative role. Rentokil’s failure to offer a trial period in this case was, therefore, held to be discriminatory, as a failure to make a reasonable adjustment.

How could it impact your business?

A trial period will not necessarily be appropriate in every case, particularly where any vacancy may be obviously unsuitable for a particular employee, or a more senior position, for which the employee is clearly not qualified. Where, however, as in this case, the alternative role was more junior and a support role to the employee’s substantive role, it was considered that there was at least a 50% chance that a trial period may have been successful. The EAT’s decision, therefore, highlights that failure to consider and offer a trial period in relevant circumstances, before moving to dismiss a disabled employee on grounds of ill-health/capability, may expose employers to claims of disability discrimination, on the basis that the trial period would have amounted to a reasonable adjustment.

What steps should you take?

Each case will, of course, still need to be considered on its own facts. If an employee lacks a key qualification or does not meet key criteria for a role, a trial period may not be appropriate. , Even if, there is doubt over a disabled employee’s skillset and experience, however, as part of the assessment of their suitability for an alternative role, employers should give serious consideration to the option of a trial period in the new role, before any dismissal decision is taken, particularly where it may be possible to upskill the employee with appropriate training during that time.

If it then turns out that the employee is unable to perform the alternative role, even after a trial and training, an employer will have better grounds to defend any challenge on the grounds of a failure to make a reasonable adjustment, if it subsequently has to take the decision to terminate the employee’s employment.

The Leasehold and Freehold Reform Act 2024

The Leasehold and Freehold Reform Act 2024 became law on 24 May 2024. It is designed to improve the rights of leasehold residential property owners in relation to acquiring the estate or building of their home; involving themselves in estate management; and extending leases.

The Act also improves homeowners’ abilities (both leasehold and freehold owners on mixed estates) to scrutinise and challenge estate charges, greatly restricts the sale of new leasehold houses, and reduces the amount of insurance commission received by landlords and managing agents.

The main components of the act have not been implemented yet and it is anticipated this will occur in stages by the next government.

How could it impact your business?

This Act will impact investors and managing agents involved with residential estates, including mixed use estates where less than 50% of a property is used for commercial purposes.

It is more likely that homeowners will be able to successfully acquire or manage a freehold. Overall income will also be reduced by increasing lease extension terms to 990 years, reducing or removing ground rents, limiting the premium payable for leases with a term less than 80 years (although this is not yet set in stone by the act), and capping insurance commissions.

A landlord will also need to meet further administrative costs and burdens. For example, service charge challenge costs are more likely to be borne by a landlord and any landlord directly involved in the management of a residential estate must join a redress scheme so that it can be challenged on any poor management practices.

What steps should you take?

The act could render the ownership of residential estates by an investor less desirable as the long-term income is likely reduced and administrative costs increase.

Investors will need to review their assets’ long-term income projections and proactively implement any management requirements imposed by the 2024 Act so as to ensure compliance. They will also need to bear in mind the impact of the right to acquire/ manage property by homeowners on any future acquisitions, disposals, and currently owned assets.

Both landlords and managing agents should take the time to read the summary of the act from the UK Government (which can be found here) and monitor it’s website for any further details published.

Russian Sanctions

On 12 June 2024, the US announced expanded sanctions targeting those aiding Russia’s military-industrial complex, including ‘secondary’ sanctions which may be applied to non-US persons based outside of the US. Specific designations also targeted different supply-chain networks used to evade sanctions outside of Russia, including Belarus, the British Virgin Islands, Bulgaria, Kazakhstan, the Kyrgyz Republic, the PRC, Serbia, South Africa, Turkey and the United Arab Emirates. The next day the UK followed suit and designated entities in the supply chain.

How could it impact your business?

These measures add to the already complex sanctions landscape and are a helpful reminder to companies operating internationally to consider whether US sanctions could also bite (in addition to the UK and EU controls).

What steps should you take?

The designations on non-Russian entities highlight that it is not only Russian entities and individuals that could raise red flags for further consideration. Companies conducting international business should continue to carefully screen and analyse all counterparties, international customers and those involved in the supply-chain for sanctions designation risk and consider its dealings against the various sanctions controls, regardless of whether they are located in high-risk jurisdictions.

Court of Appeal brings clarity on interpretation of sanctions

The Court of Appeal recently rendered judgment in Celestial Aviation Services Ltd v Unicredit Bank AG [2024] EWCA Civ 628. This overturned the decision of the Commercial Court (detailed below) and provided much needed clarity to those tasked with the job of determining whether or not a transaction is prohibited by the sanctions regime (and particularly the UK’s Russia Regulations).

Whist complex, the case essentially concerned whether or not Unicredit Bank could pay out on letters of credit to a third party where the underlying transaction would now be prohibited under Regulation 28(3) of the Russian Regulations.

The Commercial Court previously decided that Unicredit was not relieved of its obligation to make the payment, indicated that it could not simply rely on the words of Regulation 28(3) but also had to consider the spirit of the sanctions regime.

However, the Court of Appeal reversed this decision, commenting that the UK Sanctions regime is a “relatively blunt instrument that is intended to cast the net widely to ensure that all objectionable arrangements are caught”. The way to release those legitimate transactions unwittingly caught in this net is to use the licence regime, which is set up for this very purpose.

Although not strictly necessary given its earlier findings, the Court also considered the application of s44 of the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”) which provides that a person is not liable in civil proceedings where s/he has done or omitted to do an act in the reasonable belief that it was prohibited by sanctions. It confirmed the lower court’s finding that Unicredit had the requisite subjective belief that it was acting in compliance with SAMLA and cautioned against viewing the position with the benefit of hindsight. Crucially it also clarified that whilst s44 provides a liability, that does not extend to interest and costs (which are therefore payable by the losing party).

How could it impact your business?

The Court of Appeal’s decision ends a period of instability for in-house counsel and their advisers trying to determine whether businesses can proceed with transactions potentially caught by UK Sanctions.

What steps should you take?

Businesses now have a clear pathway to follow, one limited solely by the wording of the legislation. They no longer have to tie themselves in knots wondering whether the transaction in question is outside the spirit of the sanctions regime. Any ambiguity can simply be resolved by making an application for a licence.

Divergence in ESG legislation

Businesses face increasing pressures to adopt policies relating to human rights, social and environmental impacts in respect of their own operations, their subsidiaries, and value chains. However, with an increasingly fragmented regulatory landscape, businesses need to anticipate and adapt their processes to account for legislative and regulatory divergence across the jurisdictions in which they operate, examples of which are shown below.

Collaboration and Partnerships

As detailed in our February Horizon Scanning update, the Competition and Markets Authority (CMA) released guidance relating to Green Agreements, aiming at clarifying how businesses can collaborate with each other in compliance with competition law in respect of sustainability and climate change focused agreements. This is contrary to the stance taken in other countries, notably the USA, which could lead to the UK having a competitive advantage for businesses which wish to collaborate on green issues

Green Claims and Marketing Green

As detailed in our March Horizon Scanning update, the UK’s Digital Markets, Competition and Consumers Act (DMCC) has ushered in a new era of enforcement for the CMA for misleading advertising practices in relation to “Green Claims”. For businesses found to be infringing the consumer law provisions of the DMCC, penalties include fines of up to 10% annual group worldwide turnover, and director disqualification.

From an EU perspective, the proposed Green Claims Directive is expected to come into force in Q3 2024. The Directive, when enacted, would put in place obligations and requirements on undertakings in relation to the substantiation and verification of green claims, including obligations for information disclosure. Whilst the proposed legislation is currently making its way through the legislative process and is therefore subject to change, the introduction of European standards presents a risk of regulatory divergence between the UK and the EU.

Reporting Requirements

As detailed in our April Horizon Scanning update, the EU’s Corporate Sustainability Due Diligence Directive (CS3D) will come into force imminently following receiving formal adoption in the EU. The CS3D confers obligations on large EU and non-EU companies in relation to their operations and supply chains. Alongside the direct obligations placed on large companies, the CS3D presents a risk for smaller companies engaging in trading relationships with any entity caught by the CS3D requirements, as the enhanced scrutiny imposed by the CS3D will no doubt flow down the supply chain. Alongside CS3D, the EU’s Corporate Sustainability Reporting Directive (CSRD) is currently in force, having been formally adopted and will apply in the 2024 financial year.

The EU’s Carbon Border Adjustment Mechanism (CBAM) is a policy instrument introduced by the EU to address carbon leakage, where businesses shift their operations to countries with lower levels of climate regulations to evade carbon taxes or emission reduction obligations. The CBAM applies to certain goods originating in a third country which are imported into the EU (currently including cement, iron and steel, aluminium, fertilisers, and electricity).

From a UK perspective, the UK is updating its sustainability reporting standards (SRS) with a list of commitments to:

• transition plans disclosures – relating to how the UK’s largest companies can effectively disclose these plans, for example relating to decarbonisation or net-zero goals;

  a green taxonomy – building a science-based framework to set the bar for investments that can be defined as environmentally sustainable, helping to tackle greenwashing and enable investors to make informed choices; and

  an endorsement of standards set by the International Sustainability Standards Board (ISBB), setting a global baseline of sustainability disclosures focused on the needs of investors in financial markets.

The SRS is expected to set out the UK’s requirements for businesses to report on ESG matters, however this is on-hold due to the upcoming general election.

How could it impact your business?

Green Claims

As there is no concrete consensus amongst antitrust authorities on the role of competition law in the transition to low-carbon economies, businesses with operations in the UK, EU and further afield will need to consider the requirements of each jurisdiction. The CMA’s Green Claims guidance is a useful starting point, offering greater clarity on collaborations between businesses. However, it is vague in addressing how such claims should be substantiated, verified, or disclosed. For businesses seeking guidance on how best to present their green claims, inspiration can be taken from commitments accepted by the CMA, details of which are included in our April Horizon Scanning update.

The EU’s Green Claims Directive presents a higher threshold to reach for businesses in making green claims to consumers both in the EU and the EEA, including labelling requirements on consumer goods like clothing items. The standards in the directive may be used as a minimum standard for businesses to meet in their UK and EU operations, whilst keeping the regulatory landscape under regular review and observing emerging enforcement trends from the CMA’s exercise of its new powers under the DMCC.

Reporting Requirements

The CS3D will have extraterritorial effect applying to UK businesses and will require a proactive and holistic approach from businesses in respect of their ESG strategy. In cases of non-compliance, supervisory authorities can impose fines of no less than 5% of the company’s net worldwide turnover.

The CS3D dovetails with the CSRD, requiring businesses to understand their reporting requirements and scopes 1, 2 and 3 emissions in line with the GHG Protocol. The CSRD will impact business headquartered outside of the EU, with the reporting requirements applying on a threshold basis.

Businesses importing Goods into the EU must comply with CBAM, only importing goods by an authorised CBAM declarant, and declarations must contain information relating to the quantity of each good imported, the total embedded emissions, and CBAM certificates to be surrendered on import.

What steps should you take?

The global divergence of ESG standards requires that businesses address jurisdictional differences on environmental legislation. It is crucial that businesses understand the geographic markets where they operate as well as the requisite regulatory framework in which they operate, and tailor their ESG strategy accordingly.

After understanding the regulatory framework, businesses will need to take action to enforce their policies across their business and in their value chains and should:

• Actively engage with stakeholders (including suppliers, customers, persons close to the operations of the business) to address ESG concerns and appropriately tailor an ESG strategy.

• Empower shareholders in all ESG matters, including reporting.

• Embed compliance with ESG policies in contractual arrangements with suppliers or customers and engage in active compliance monitoring of ESG policies.

• Assess any Green Claims and ensure that these are substantiated and backed by objective evidence, which can (if necessary) be verified by an external expert.

• Develop corporate reporting strategies in line with UK SRS, EU CS3D and CSRD if applicable.

• Review reporting standards and begin to collect data from suppliers, stakeholders, customers, and any other relevant upstream / downstream operators in respect of Scope 1, 2 and 3 emissions.

Businesses will need to actively manage their approach to ESG and engage advisors on an ongoing basis to navigate the diverging regulatory landscape between the UK and EU, with ESG policies being only one aspect of their strategy.