Proposed reforms to UK retail disclosure rules take shape

As part of ongoing work to replace retained EU law, the UK government and the Financial Conduct Authority (FCA) are overhauling the UK’s EU-inherited retail disclosure rules. What is the nature of the changes and the next steps for firms to consider in advance of the new rules?

Why a new regime?

The new Consumer Composite Investment (CCI) regime, as proposed, is set to replace three EU-inherited disclosure regimes: the Packaged Retail Investment and Insurance Products Regulation, known as PRIIPS; and the disclosure rules applying to UK authorised retail funds, known as UCITS (Undertakings for the Collective Investment in Transferable Securities), and Non-UCITS Retail Schemes, which cover retail funds that do not meet all the conditions required of UCITS, known as NURS.

UK PRIIPS was introduced to help retail investors understand the key features of investment products through a standardised disclosure document known as a key information document (KID). However, the FCA views this rigidly-templated document as ineffective in helping consumers make informed investment choices. As such, the KID, alongside similar prescriptive key investor information documents (KIIDs) currently required for UK UCITS and NURS, will be retired.

Overview of new CCI regime

Instead, the Treasury and FCA are introducing the CCI regime. In summary, this covers investments whose returns depend on the performance of, or changes in, the value of indirect investments. Pension products, pure protection contracts and some other investments are excluded, but firms will need to consider the products they distribute one by one to assess whether they are caught.

All products currently covered by UK PRIIPs, UK/EEA UCITS and NURS disclosure requirements are in scope; some non-PRIIPs packaged products are likely to be as well.

Designated activities

The new rules use the designated activities regime introduced in 2023. This allows the Treasury to create "designated activities" for which the FCA is empowered to make rules, whether firms conducting them are authorised or not. This also allows the FCA to apply CCI rules to firms that market funds into the UK under the overseas funds regime, such as EEA UCITS.

With regard to CCIs, the Treasury has created four designated activities: manufacturing, advising, offering and selling.

Manufacturer and distributor duties

Under the new regime, CCIs must be accompanied by a "product summary" (replacing the KID/KIID) whenever they are distributed to retail investors.

Preparing these is the responsibility of manufacturers (those who create the CCIs), who must provide the summaries alongside "core information" relating to the product (such as objectives, redress, costs, risk and performance) to distributors in good time before distribution begins.

If they wish, distributors can tailor the product summary for their end customers, in light of the core information and under due consideration of their consumer duty obligations. They can also produce additional customer-facing materials – the key is to ensure understanding.

Product summaries should be given to customers early in their investment journey, and again in a "durable medium" (so customers can store and refer to them) at the point of sale.

Product summary contents

Unlike a KID or KIID, product summaries do not have a prescribed format. Instead – in the spirit of the Consumer Duty – firms must tailor them to the product being described, with the aim of ensuring consumer understanding.

This does not mean total freedom. The rules retain some degree of prescription, particularly on the description of risks and costs. For example, costs information needs to include an explanation and examples of any performance fees and carried interest. A summary of costs over a 12-month period is required, with a description of the impact on returns.

On risk, the FCA is moving from a 1-7 risk-reward score to a 1-10 metric to prevent "bunching" and ensure more granular variation. Risk scores are to be accompanied by descriptions balancing risks and potential rewards, presenting a more holistic picture of factors that might affect performance. The FCA has proposed guidance on how to score particular products, such as those with high leverage, low liquidity or capital guarantees. A past performance graph, covering 10 years where possible, must also be provided.

Bringing unauthorised firms into scope

The new regime applies to non-authorised firms as well as authorised ones, if they undertake CCI-related designated activities. Unauthorised firms are not subject to the Consumer Duty.

To make up for this, the FCA is proposing to apply some high-level standards for unauthorised firms carrying on CCI activities, such as offshore fund managers utilising the overseas funds regime. These will be basic product governance standards, requiring unauthorised manufacturers to establish a product approval process that ensures, among other things, that the product can meet the needs of its target market and provide fair value. The FCA will also require unauthorised firms to comply with rules equivalent to other high-level principles authorised ones are subject to, for example concerning integrity, due skill and care, management and control and client assets.

Given the wide definition of a manufacturer, which encompasses multiple activities in relation to a CCI, this raises the question as to whether an overseas fund's board, administrator or general partner would be subject to the new standards. Firms which play a material role in the manufacture of a CCI in collaboration with others may also fall under the "manufacturer" definition.

New, principle-based approach

Fundamentally, the proposals represent a shift from a highly prescriptive disclosure regime to one that is more flexible, requiring a principle-based approach to decide how best to communicate with consumers. The FCA hopes that this shift will push firms to innovate in how they provide their product information, for example through the use of consumer-friendly digital communications.

Close-ended investment companies

In November 2024, the Treasury passed new legislation to exclude some closed-ended listed investment trusts from the PRIIPs regime place. These products are therefore not currently subject to detailed product information requirements.

While this may temporarily reduce the administrative burden for some firms, the products concerned will be subject to the new CCI regime when it comes in. The FCA has tailored its proposals to suit them, to ensure a more accurate articulation of costs, charges, risks and performance.

Osborne Clarke comment

While some may welcome the freedom and flexibility that this new regime offers, a less prescriptive approach is likely to expose firms to a degree of risk, since – as with the Consumer Duty – compliance becomes harder to demonstrate.

Unauthorised firms in particular should be aware that they may be caught by new, unfamiliar standards, and EU firms may find that the FCA's approach is at odds with more prescriptive requirements that remain in force in their home jurisdictions.

Given the large-scale changes the proposals seek to introduce, affected firms should start considering now which products they manufacture or distribute might count as CCIs and how to comply with the new requirements in relation to those products. Firms should anticipate the need to coordinate with stakeholders along distribution chains once the final rules are made and start planning how to do this now.

This Insight was written with the assistance of Flora Stafford, trainee solicitor at Osborne Clarke.