FCA consults on New Retail Disclosure Regime
Introduction
As outlined in our previous alert, the Consumer Composite Investments (Designated Activities) Regulation 2024 (the CCI Regulation) granted the UK Financial Conduct Authority (the FCA) the power to make rules, guidance, and policy statements to supplement the CCI Regulation. The remaining provisions will come into force on the day on which the revocation of the U.K. PRIIPs Regulation comes into force.
In late December 2024, the UK Financial Conduct Authority (FCA) published a consultation paper on a simplified and flexible retail disclosure regime for consumer composite investments (the CCI Rules), which is intended to replace the existing PRIIPS regime. The consultation closes in just over a month on 20 March 2025.
The new regime is expected to be in place by Q2/Q3 2025 (subject to certain transitional provisions), but firms will have 18-month to comply with the new requirements.
Product in Scope
A consumer composite investment (CCI) is “an investment where the returns are dependent on the performance of or changes in the value of indirect investments”1, this will include structured products and deposits, open and closed ended funds, certain debt securities that are currently classified as PRIIPs, contracts for differences, insurance based investment products (eg life insurance policies, unit linked policies etc.), and other complex products such as derivatives.
The CCI Rules clarify that the following products are outside scope: pension schemes, deposits that are not structured deposits, pure protection contracts, and long-term insurance contracts where benefits are only payable on death or sickness. The FCA has clarified that a ‘make whole’ call option, which is a feature commonly found in corporate bonds will not normally be a CCI.
Furthermore, the CCI Rules will not apply to readily realisable securities where:
- the minimum investment is GBP50,000 for each end-investor;
- the marketing material contains clear and prominent disclosures that the security is being offered to investors that qualify as professional clients or eligible counterparties and are not intended for retail investors; and
- the issuer (or in relation to secondary offerings, the distributor) has taken reasonable steps to ensure that the offer and associated promotional material and communications are directed only at non-retail investors.
Activities in scope
The CCI Rules will apply to the following designated activities regardless of whether the firm is an authorised person for UK regulatory purposes2:
- Acting as the manufacturer: persons who create, develop, design, issue, manage, operate, or carry out a CCI including being able to make changes to a term, condition or feature of a CCI which is made available to UK retail investors; and
- Acting as a distributor: persons who offer, advise on, or sell a CCI, or provide investment services relating to a CCI, which is made available to UK retail investors (or an agent of a UK retail investor in relation to advising on CCIs).
Roles of manufacturers and distributors
The manufacturer will be required to produce a stand-alone product summary (which should include the issue date, investment objectives and policy, costs and charges, risks, redress option (eg FOS and FSCS3), and past performance of the CCI), which will replace the KID and a machine readable core information file to distributors. The product summary and core information file must be provided prior to the point of sale and be publicly accessible on a website.
The product summary and core information must be updated every 12 months while the CCI continues to be distributed, and material changes must be flagged to distributors. The manufacturer must share additional details with distributors and respond to distributor feedback.
Distributors will need to provide the product summary in a “durable medium” at the point of sale, or very soon after. The distributor can either use the manufacturer produced product summary or create its own or use a combination of both. This will allow distributors to tailor their disclosures to specific clients based on their specific needs (including providing additional information if required to facilitate retail investor understanding of the CCI). The FCA is encouraging distributors to present the information in an engaging and interactive way (eg hover-over buttons, hyperlinks, or pop-ups) to increase consumer understanding of risk of the CCI.
Distributors will only be able to advise on or sell a CCI for which a product summary is available.
Disclosures
Firms will have the ability to design product information, as the existing format and template requirements will no longer apply. Product information will need to be disclosed early in the customer journey and if a sale is ultimately made, the product information will be required to be provided in a durable medium.
In relation to risk disclosure, the CCI Rules will replace the current 1-7 risk metric with a 1-10 risk metric based on product volatility. The FCA proposes a minimum risk score of at least 9 for high-risk products (including structured products, CFDs and derivatives). Firms will be required to provide descriptions of the material risks and potential rewards associated with the CCI.
The CCI Rules also mandate how information on costs and past performance should be presented in the product summary. Manufacturers will need to disclose the product’s aggregated ongoing cost percentage for each CCI. The CCI Rules permit a more granular breakdown of costs (although the aggregate figure must be more prominent).
Cost information should include an explanation to facilitate understanding and examples for performance fees and carried interest. A summary of costs over a 12-month period would also need to be included.
Past performance will need to be illustrated through a performance graph for the life of the CCI or ten years, whichever is shorter. General information about the key factors that determine the performance of the product would need to be provided for all CCIs.
Unauthorised manufacturers
The FCA will require unauthorised firms carrying on CCI activities with UK retail investors/clients to comply with certain high-level standards including:
- UK product governance standards which will consist of implementing a product approval process, ensuring that a CCI is designed to meet the needs, characteristics, and objectives of the target market, that it will provide fair value, that its risks to investors are assessed, and that the product’s distribution strategy is appropriate4; and
- obligations that are equivalent to the Principles 1 (integrity), 2 (skill, care, and diligence), 3 (management and control), 10 (client assets), and 11 (relations to regulators) of the FCA’s Principles for Businesses.
The FCA clarifies that it does not intend to apply the requirement concerning fair value to funds which are recognised schemes.
Next Steps
The new rules mark a significant departure from the prescriptive KID template format and extends the scope of certain requirements to unauthorised persons and non-UK firms.
Firms should consider: (a) which products and services fall in scope; (b) what information is required to disclose to retail clients (this may entail some interaction with clients that could be informed by assessment made as part of the consumer duty implementation process); and (c) prepare to make changes to communications, disclosures, polices, and procedures.
If you have any questions in relation to the new regime, please contact Karen Butler.
1Page 5 of FCA CP24/30.
2Meaning authorised by the UK prudential regulation authority and/or the FCA for the purposes of section 19 of the Financial Services and Markets Act 2000.
3Financial Ombudsman Service and Financial Services Compensation Scheme.
4Page 31 of the FCA CP24/30.
