Consumer Duty and related reforms

The proposed changes would clarify the definition of retail market business, simplify the definition of a product, clarify what brings firms into a ‘distribution chain’ and update the FCA’s rules on what represents ‘material influence’ over a retail product or service. In addition, there would be changes for co-manufacturers with proposals for primary/secondary manufacturers, clarifications on outsourced arrangements and codified exclusions for specific activities such as the provision of ESG ratings and aspects of depositary services. Overall, some firms are likely to find these clarifications useful, but there is a risk they could introduce new interpretation challenges for firms.

The most notable proposals are around clarifying how firms can reasonably rely on information provided by other firms, welcome clarifications on vulnerable customers for manufacturers that are remote from them, and on supporting a more proportionate approach to information gathering and sharing across the distribution chain (i.e. limiting it to information that is genuinely useful). Notably the FCA has not prescribed in detail how information should be gathered and shared, nor has it tightened the rules on firms that fail to respond to information requests – likely leading some firms to be disappointed. However, it is planning further work and potentially sharing good practice examples in this space.

The FCA has proposed a more proportionate approach to board reporting based on the extent of a firm’s retail market business and broader footprint. The changes would no longer require a stand-alone Duty report, allowing reporting to be incorporated into BAU reporting structures. Although this is potentially a helpful clarification, this is unlikely to result in a significant burden reduction for firms, especially where board reporting and outcomes monitoring has already been incorporated into wider arrangements.

 The FCA decided not to propose changes to the product governance handbook (PROD 3) for several reasons, including the differing scope to the Duty and potential divergence with the EU MiFID regime. Regarding interaction with the Consumer Composite Investments (CCI) regime, the FCA has proposed small changes to clarify that for firms that are only manufacturers, producing the product summary document would be the primary way that they meet their consumer understanding obligations.

In CP26/24, the FCA proposed changes to the UK MiFID costs and charges regime to align the requirements for distributors with recent changes introduced under the regime. The changes would also simplify and consolidate the MiFID, IDD and non-MIFID disclosure requirements. 

Amongst the proposals, which have the potential to have a significant impact on distributors, it is especially noteworthy that the FCA also proposed that CCI manufacturers would not be required to update their existing Key Information Documents (KIDs) or Key Investor Information Documents (KIIDs) during the CCI transition period, unless there are material changes. Notably, under the proposals, manufacturers that publish a CCI product summary during the CCI transition period would also need to continue to publish the associated KID/KIID on a website until the end of the period. These proposals are likely to push industry’s implementation timeline from February 2027 (where some firms had been coalescing) to closer to the end of the transition period in June 2027.

In addition, the FCA proposed wider changes, including formalising its expectations for interest on cash balances and minimising the risk of "double-dipping." Under the changes, firms would need to clearly disclose the interest consumers will receive on cash balances and any fees charged on cash held in investment accounts. 

Building on earlier simplification changes for insurers, in CP26/22 the FCA proposed equivalent scope changes to CP26/23, narrowing the territorial scope of ICOBS and PROD 4 where business has little or no UK connection, thereby reducing duplicative regulation. Other proposals include the removal of unnecessary disclosure requirements, increased flexibility in the means of disclosure (rather than paper-based by default) and simplifying the rules for advised sales.

The FCA’s post-implementation review of the general insurance value measures identified inconsistencies making data comparison and use difficult. To go some way to address this and reduce the reporting burden, the FCA is consulting on the removal of two requirements. This is a small step ahead of a wider consultation on the rules expected in H1 2027.

The FCA’s review identified good and poor practice across strategy and frameworks, data, management information (MI) and testing, and governance, oversight and culture. Stronger firms took a structured, evidence-based approach, using MI to identify risks, evaluate the customer journey, challenge performance and improve outcomes. However, weaker firms needed to adopt more proactive, outcomes-focused monitoring, demonstrate how insights prompt action and evaluate whether interventions work.

The review showed encouraging signs of improvement with evidence of strengthened product governance. However, practices were inconsistent across firms. In a similar vein to the outcomes monitoring findings, stronger approaches were structured and evidence-based and focused on the use of MI to improve customer outcomes. Weaker practices included placing too great a reliance on broad or generic target markets which can inhibit suitability assessments and subsequent outcomes monitoring, high level monitoring frameworks, and failures to demonstrate a link between monitoring and actions. 

The FCA has seen significant improvements in the quality of Consumer Duty Board reporting but expects firms to continue making progress. Key areas highlighted for improvement include the assessment of consumer understanding and support, greater clarity on how data evidences outcomes, a lack of evidence of meaningful board challenge and improvements around distribution chain oversight.

While reporting quality is improving, challenges remain and the FCA’s expectations are rising. Whilst a more streamlined approach to reporting has been proposed, firms should consider these findings in the context of all Duty reporting and use the reporting cycle to address key challenges and strengthen governance and oversight arrangements.

 Several improvements can be made:

• Define clear outcomes that focus on preventing real-life harm and are well integrated into monitoring arrangements owned by the first line of defence.
• Review first-line accountability arrangements for monitoring and acting on findings.
• Feed the insights derived from outcomes monitoring back into product design.

Given the increasing scale of available data, firms will want to consider where technology solutions, including AI, can provide deeper insights or greater efficiencies.

As the end of the transition period looms in 2027, there is significant work remaining for some firms to be ready, including finalising product summary documents, implementing relevant system builds and completing consumer understanding-related testing.