Cutting back the Consumer Duty

The FCA has this week published its proposed rules to meet the government’s commitment in last year’s Leeds Reforms to provide more certainty on the scope and application of the Consumer Duty. The FCA has said that the Consumer Duty is being applied more widely and intensively than needed, leading to unnecessary cost, complexity and uncertainty. 

The headline proposals are to: 

• narrow the scope of the Consumer Duty by excluding certain specified wholesale business activities as well as business with non-UK customers;
• allow for more proportionate compliance with the Consumer Duty so that firms with limited influence on consumer outcomes can streamline their adherence to the Consumer Duty; and
• provide greater clarity on the application of the Consumer Duty across distribution chains. 

The FCA’s consultation, CP26/23: Consumer Duty – scope and proportionality, will be of particular interest to wholesale firms which do not service retail clients directly but felt compelled to make changes to their business when the Consumer Duty was first implemented. 

Scope reform

The FCA has sought to make it clearer where the Consumer Duty applies and where it doesn’t, including through worked examples. A new chapter PRIN 3A sets out the relevant provisions relating to the scope of the Consumer Duty and now includes changes to some of the foundational definitions for “retail market business” and “product”, a new definition of “distribution chain” and new rules and guidance on the roles and responsibilities of firms in the distribution chain. 

The FCA has confirmed that the vast majority of the wholesale market is completely out of scope of the Consumer Duty. The following activities have been explicitly excluded from the Consumer Duty (the “Wholesale Business Exclusions”): 

• activities of a firm where its role is limited to providing certain products or services that act as components in a third party’s retail product or service. This would include the provision of an investment to a fund manager to enable that fund manager to achieve investment objectives within a product that the fund manager provides and in respect of which the fund manager owes investors a fiduciary duty. Additional activities are also included under this exclusion such as certain derivative and financing arrangements;
• acting as a third-party custodian where the custodian does not engage directly with retail customers;
• acting as a depositary where the depositary does not engage directly with retail customers;
• market making;
• provision of ESG ratings;
• supporting defined benefit pension scheme trustees with respect to scheme members where the trustees are not retail customers;
• merchant acquiring;
• acting as an indirect access provider to the UK interbank retail payment systems;
• safeguarding of funds for payment services or e-money activity where firms don’t engage directly with retail customers in relation to this activity; and
• the Society of Lloyd’s (save that managing agents conducting business for retail customers will remain within scope).

Although the FCA’s expectation is that firms subject to the Consumer Duty would have responsibilities under all the outcome rules, it recognises that this will not always be the case. The FCA proposes to amend the rules to clarify that firms don’t need to comply with rules under one or more of the four outcomes in PRIN 2A.3 to 2A.6 if they don’t conduct a particular role, process or step that is the subject of these rules. An example of this would be where a firm has no role in preparing or issuing communications, it will not need to comply with obligations relating to the consumer understanding outcome. 

The FCA has included a new rule and guidance in PRIN 2A.7 in relation to the application of proportionality (the “Proportionality Principle”). Instead of focusing on the concept of material influence when determining a firm’s obligations under the Consumer Duty, the FCA’s guidance is more focused on a firm’s role and extent of involvement with a retail product and service. Example scenarios are provided including in relation to model portfolio services. 

Although many of the changes appear clarificatory in nature and likely reflect many firms’ current understanding of Consumer Duty scope, there are some new rules that will go beyond existing expectations, in particular in relation to co-manufacturers and firms in distribution chains. 

Co-manufacturers

The FCA proposes to remove references to “co manufacturing” from the Consumer Duty rules and guidance and instead provides for a new concept of “principal” or “secondary” manufacturer. Firms with “substantive control” over the design or operation of the product or service would be classed as the principal manufacturer and subject to more obligations than those firms classified as secondary manufacturers. Secondary manufacturers will benefit from modified obligations in relation to product governance and the value assessment. 

The FCA has proposed indicative factors for where a firm would be considered to have substantive control (including, for example, a firm with the power, right or ability to make decisions about core aspects of a product’s design, operation, distribution strategy, or value proposition for end retail customers). 

A co-manufacturing agreement will still be required but the responsibility for this falls on principal manufacturers which must ensure that the agreement is:

• a clear, true, and non-misleading reflection of the reality of the arrangements between the manufacturers and their respective contributions to the manufacture of the product; and
• reasonable in light of each manufacturer’s resources, capabilities and relevant expertise in relation to the product.

The FCA has provided new guidance in relation to particular arrangements including outsourcing and white labelling and recognises that there may be circumstances where there is more than one principal manufacturer. Whilst the FCA would generally expect an outsourced service provider to be the secondary manufacturer, the FCA accepts that this will not always be the case and such a provider may additionally be a principal manufacturer.  

The FCA has not proposed to align the new co-manufacturing rules with those in PROD but has asked for stakeholder views as to how these changes could impact firms which are also subject to PROD and asked for feedback as to whether it should be making similar changes to the rules in DISC and PROD. 

Responsibilities in the distribution chain

The FCA has clarified that firms are not required to actively police other firms in the distribution chain: they are only responsible for ensuring compliance in respect of their own role and activities; and are not expected or required to oversee the compliance of other firms in their distribution chain, unless other regulation or contracts require this. Firms are still required to report to the FCA on other firms’ compliance. However, the bar for reporting has been raised and will now only arise where a firm has material concerns about the conduct of another firm in the distribution chain. 

The FCA recognises that information flows across distribution chains are one of the most challenging parts of the Consumer Duty and whilst there are some new rules to address this, firms may consider that the proposals do not go far enough to address information gaps. 

In particular, there are new rules regarding reliance which require firms sharing information with other firms in the distribution chain to take reasonable care to ensure the information can be relied upon as well as entitling firms to place reasonable reliance on the information and representations of another firm in the distribution chain. 

Firms with non-UK customers

The FCA proposes to limit the Consumer Duty to retail market business where the retail customer is usually resident in the UK (based on the customer’s residential address or where the customer is not an individual, the place of establishment). The FCA has carved out an exclusion from this approach for certain customers and products and services such as crown servants posted overseas (including UK armed forces personnel) and for pre-paid UK funeral plans and UK pensions.

Board reporting

The FCA has introduced specific rules to provide for a proportionate approach to board reporting. A stand-alone Consumer Duty report is not required and Consumer Duty reporting can be incorporated into other board reporting structures. 

Management information 

The FCA has included specific guidance providing for a more risk-based approach to information collection. For example, under the new guidance a proportionate approach could mean gathering less information to monitor an established product with well understood risks and benefits to customers, but focusing more on monitoring for risks and any potential harms that could be caused by a product new to market. 

Firms are not expected to collect large amounts of quantitative data where this does not provide useful insight on whether the activities a firm is responsible for are delivering good outcomes for retail customers. Instead, the FCA has included new guidance which recognises the benefit of more qualitative monitoring activities, such as periodic meetings with key partner firms in the distribution chain.

Next steps

Firms have until 18 September 2026 to respond to the consultation. Firms looking to reduce their Consumer Duty compliance burden should consider the extent to which they can benefit from the proposed reforms. In particular, they should: 

• assess any wholesale business which may fall out of scope under the new Wholesale Business Exclusions;
• consider the extent to which they can rely on the Proportionality Principle to streamline some of their Consumer Duty compliance;
• identify any non-UK business that may fall out of scope;
• assess whether they would be a principal or secondary manufacturer (and any consequential changes to their obligations as a result of the categorisation);
• review distribution-chain arrangements to assess whether contractual roles, information flows, due diligence and reliance on other firms are proportionate under the proposed changes; and
• review the adequacy of their board reporting and identify if there is scope to make the process more efficient and proportionate.