UK FCA consults on scope and proportionality of the consumer duty

The UK Financial Conduct Authority (FCA) has published consultation paper CP26/23 on the changes to the scope and proportionality of the consumer duty. This follows recent developments in response to calls for clarity on the application of the duty in the context of wholesale markets and complex distribution chains, and the FCA's commitment to address these concerns. For further background on this, you may be interested in our webinar titled "Ahead of the Curve: Consumer duty" is the future brighter for wholesale firms?.

The proposals relate to the FCA rules and guidance, including non-handbook guidance. The key proposed changes are as follows:

• Application of the duty limited to retail market business with UK customers. This would amend the current approach where the duty is applied in accordance with sector-specific conduct rules, meaning that if those sector-specific conduct rules apply to cross-border services, so does the duty. The proposal seeks to reduce complexity and cost in potentially applying overlapping regimes for cross-border activity. Note, however, that certain exclusions apply, for example in relation to Crown servants living overseas, pre-paid UK funeral plans and regulated or ancillary activities for UK pensions.
• Clearer delineation of six key concepts which are used by firms to work out how the duty is meant to apply, those concepts being: (i) retail market business; (ii) relevant exclusions depending on the nature of the business; (iii) product definition; (iv) distribution chain; (v) specific disapplication depending on the firm's role; and (vi) material influence.
• New rules and guidance on proportionality in the context of distribution chains. The FCA is proposing a new chapter PRIN 2A.2A with rules and guidance on firms' roles and responsibilities, which (among other things) confirms a standard of "reasonable reliance" which applies when firms' compliance depends on other firms' information or actions and includes detailed requirements where there are multiple manufacturers and multiple distributors.
• Explanation on how the duty interacts with product governance requirements in chapter 3 of the PROD sourcebook in the FCA handbook, and the consumer composite investments regime.

The FCA is also taking the opportunity to make some technical clarifications so that the rules and guidance reflect the policy intent.

The consumer duty's impact on wholesale firms has attracted significant industry attention, and interested firms should scrutinise these proposals and engage with the consultation paper where needed to ensure that changes are made appropriately and evidence a clearer distinction between wholesale and retail market business. The deadline for comments is 18 September. The policy statement is expected in Q1 2027.

Readers who are also interested in cryptoasset development should also note our update in the Fintech section on the FCA's policy statements in respect of the new UK crypto regime, which includes discussion on retail access and the regulatory perimeter as it applies territorially.

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