In the Consultation, the FCA is proposing a series of targeted changes aimed at making the Duty more proportionate, particularly for wholesale firms, firms operating in complex distribution chains, and firms with international business. The FCA’s view is that the Duty has, in some cases, been applied more broadly and more intensively than intended, creating unnecessary costs and operational burdens without corresponding benefits for retail consumers.

The consultation focuses on:

  1. Reducing the territorial scope of the Duty by excluding most business with non-UK customers.
  2. Clarifying when firms are within scope of the Duty, particularly in wholesale markets and distribution chains.
  3. Supporting a more proportionate application of Duty requirements.
  4. New exclusions for certain wholesale activities.
  5. More proportionate application of the Duty.
  6. Clarifying interaction with existing product governance and disclosure regimes.

Key Proposed Changes

1. Consumer Duty to apply primarily to UK retail customers

The FCA proposes that the Duty will only apply where the retail customer is usually resident in the UK, based on the customer’s residential address (or, for non-individuals, established in the UK). Business conducted solely for non-UK retail customers would generally fall outside the Duty.

There would be limited exceptions where there is a strong UK connection, including:

  • UK firms conducting pension-related activities for UK pensions to customers who are not usually resident in the UK
  • UK pre-paid funeral plans sold to customers living outside the UK

The proposed changes would reduce the compliance burden on firms serving overseas retail customers by limiting overlap between the UK Duty and local regulatory regimes which would have the effect of simplifying monitoring, reporting and outcomes-testing requirements, and potentially enhancing the UK’s international competitiveness. However, firms would still need to implement robust processes to identify and evidence customer residence, and monitor and, where necessary, update distribution controls to prevent products intended for non-UK markets being sold to UK customers. Firms would also need to decide whether to maintain a single global Consumer Duty standard or adopt separate approaches for UK and non-UK business.

2. Greater clarity on which activities are within scope

The FCA proposes to simplify and reorganise the application provisions of the Duty by introducing clearer definitions of key concepts that determine the scope of the rules, including “retail market business” and “material influence”. It also proposes a simplified definition of products and services, together with clearer guidance on what constitutes participation in a distribution chain, making it easier for firms to assess whether they form part of such a chain and are therefore subject to the Duty. In addition, the FCA aims to provide greater clarity on the extent to which firms are able to determine or materially influence retail customer outcomes.

These changes will provide greater certainty about whether the Duty applies and will provide firms with information to perform scoping assessments more easily and align their actual role in a distribution chain with their regulatory obligations.

3. Clarification of distribution-chain responsibilities where firms are working together

The FCA proposes to reinforce that firms are responsible for their own activities, not for policing other firms when more than one firm contributes to the manufacture of a product or service. This includes where there are outsourcing arrangements in place. It also intends to provide more guidance on when firms can reasonably rely on information supplied by others.

The consultation further introduces a distinction between:

  • Principal manufacturers (firms with substantive control over product design and operation); and
  • Secondary manufacturers (firms making more limited contributions)

Secondary manufacturers would face more limited obligations under the products and services and price and value outcomes to i) consider the impact of the firm’s contribution on the manufacture of the product or service and on its price and value; and ii) ensure that its contribution doesn’t create material risks, for example that a product causes foreseeable harm to retail customers.

The proposed changes could reduce duplication of oversight activities and lessen the need for extensive due diligence on counterparties, while providing greater certainty regarding accountability in product manufacturing arrangements and useful clarification for firms operating outsourced models or structured product arrangements. However, firms may need to review and amend existing manufacturing agreements, assess whether they should be categorised as a principal or secondary manufacturer, and ensure that roles and responsibilities are clearly documented, given the increased importance of such documentation under the revised framework.

4. New exclusions for certain wholesale activities

The Consultation proposes additional exclusions from the Duty scope, including certain wholesale activities such as market making, merchant acquiring, ESG ratings provision and certain payment-system access arrangements. The clarification of these exclusions is likely to be one of the most significant changes for wholesale firms and will hopefully remove uncertainty over whether purely wholesale activities are subject to the Duty. It will also provide a clearer boundary between wholesale and retail regulatory obligations with fewer governance and monitoring requirements for activities remote from retail outcomes.

5. More proportionate application of the Duty

The FCA suggests amendments and guidance confirming that firms should apply the Duty according to:

  • Their role and activities in the distribution chain. Firms are not expected or required to oversee the compliance of other firms in their distribution chain unless required by other regulation or contracts.
  • The information reasonably available to them. Where a firm’s compliance with the Duty depends on information provided by, or actions carried out by, another firm in the distribution chain, the firm may reasonably rely on that information and on representations made by that other firm about the actions it has taken.
  • Their ability to influence customer outcomes.

This includes specific changes relating to:

Vulnerable customers

Firms without direct customer relationships would not be expected to identify individual vulnerable customers but would still need to consider vulnerability risks arising from their own activities, taking steps to mitigate the risk of harm to customers, including those in vulnerable circumstances, where appropriate. Those firms closer to the consumer, such as distributors, have more direct responsibilities for identifying and responding appropriately to customers’ needs, for example by taking reasonable steps to ensure that individual customers are able to understand product features and by responding flexibly to their support needs.

Information gathering

The FCA recognises that firms working together across distribution chains, by collecting and sharing information that enables them to understand whether products and processes are working well for consumers and to address any issues, is a key component of the Duty. However, the FCA proposes a more targeted and practical approach focused on collecting information that is genuinely useful and necessary to assess customer outcomes and understand whether firms are meeting their Duty obligations rather than simply gathering large volumes of data which can add limited insight and is resource intensive and costly for firms.

Board reporting

Responding to feedback from firms that they would like greater clarity on board reporting expectations, particularly for firms which are further removed from retail customers, the FCA expressly states that it was never their intention for Duty-related board reporting to be onerous or to take up a disproportionate amount of boards’ time. The FCA has said:

  • Board reporting should be proportionate, and at least annually, as the level and complexity of the report will vary between firms.
  • Firms do not need standalone Duty reports.
  • Firms with limited in-scope activity will be able to provide correspondingly limited reporting.
  • Firms should continue to demonstrate how their governance supports good outcomes for retail customers where the Duty applies.

6. Interaction with other product governance and disclosure requirements for retail investment products

The FCA is also consulting on how the Duty interacts with other rules that apply to firms’ manufacture of retail investment products including wholesale firms, whose products are distributed by other firms. These include product governance requirements in PROD 3 and disclosure requirements under the Consumer Composite Investments (the CCI) regime.

The FCA is proposing targeted updates to help firms understand how these other regimes interact with the Duty as well as clarifying, as they are doing elsewhere, that firms are only responsible for ensuring compliance in respect of their own role and activities.

The FCA has provided analysis of PROD 3 in particular and has confirmed that it continues to serve an important role in relation to scope, cross-border application and legal certainty. Given the complexity in these areas, removing or disapplying it could give rise to unintended consequences. Any future changes would involve careful consideration of a range of what the FCA says are technically complex factors which do not operate in isolation and changes in one area may have knock-on effects elsewhere.

The FCA emphasises that manufacturers should not assume they need to undertake additional duplicative disclosure work merely because they are subject to both regimes.

Overall Impact Assessment

The FCA is seeking to preserve the Duty’s consumer-protection objectives while significantly reducing uncertainty and compliance burdens. For many firms, particularly those removed from direct retail customer contact, the proposals could materially narrow the practical application of the Duty and reduce governance and monitoring requirements.

There are a number of areas where firms may wish to contribute to this consultation paper and Doyle Clayton would be happy to discuss these matters.

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