FCA rewrites disclosure approach for retail investment products

The FCA published a consultation (CP24/30) on 19 December 2024, proposing rule changes for the new Consumer Composite Investment (CCI) disclosure regime.

The consultation follows the Government passing legislation on 21 November 2024 to replace the Packaged Retail and Insurance based Investment Products (PRIIPs) Regulation, and the Undertakings for Collective Investment in Transferable Securities (UCITS) disclosure requirements with a new UK regime. The FCA is aiming for the new CCI regime to be simpler and less prescriptive compared to the previous regimes, but will place the onus on firms to deliver good consumer outcomes.

What does this mean?

The FCA’s rules will apply to all firms which manufacture or distribute CCIs. This includes overseas funds in the Overseas Funds Regime (OFR). CCIs are defined by the FCA as investments where the returns are dependent on the performance of, or changes in, the value of indirect investments. These specifically include structured deposits, securities which embed a derivative and insurance-based investment products, but excludes pension products and pure protection contracts of insurance.

The legislation passed by the Government empowers the FCA to make rules that apply to non-authorised persons and entities specifically in relation to their CCI activities.

The FCA sets out the following key principles for the new CCI regime:

Flexible, proportionate, and technology neutral to encourage firms to develop innovative and engaging ways of presenting product information to consumers.
Outcomes-focused and designed around the Consumer Duty, so that firms can focus on delivering good outcomes for their customers instead of prescriptive rules.
Enable consumers to get the right information at the right time, with more emphasis on distributors embedding product information into the consumer journey to support consumer understanding.
Standardisation only where needed so consumers can effectively compare the costs and charges, risk, and performance of different products to make timely and effective decisions.

This will mean that Key Investor Documents (KIDs) in specified formats will no longer be required, and firms will have some flexibility in describing costs and their impact on returns. The FCA also proposes combining risk-reward information and moving from a 1-7 risk metric based on market and credit risk, to a 1-10 metric based on market volatility, and requiring a graphical representation of returns for up to a 10-year period.

While greater flexibility is a theme throughout the consultation, the FCA also recognises the importance of standardisation in certain areas to support comparability. This is true for costs, where the FCA has proposed a detailed methodology to ensure all participants are held to the same standard.

The FCA has committed to engaging with stakeholders throughout the consultation process. The regulator is also performing consumer testing of its proposals, in order to assess consumer understanding of product information. The output from this engagement with firms and consumers will feed into the final rules developed by the regulator.

Firms will have an 18-month transitional period, where existing KIDs/KIIDs will remain compliant.

What do firms need to do?

Firms should prepare to take responsibility for key product information presented to consumers.

Firms should consider the nature and structure of their products, the associated fees and costs and what ‘good’ information may look like.

Firms should engage with the FCA’s consultation and respond by 20 March 2025.

A key aspect of the new CCI regime is the planned flexibility available to firms in their communications with consumers. While this flexibility creates opportunities for innovation, it also transfers a greater level of responsibility onto firms to ensure they are meeting the information needs of consumers.

Without a KID style document with a set template, firms will have to decide on the best method to provide all relevant information to consumers and take responsibility for ensuring that it is effective. Given the inherent challenge of consumer financial capability, as well as the ongoing focus on vulnerable customers, this may be challenging for firms.

Conversely, the greater flexibility offered may present opportunities. Firms utilising technology will benefit from moving away from a prescriptive, long-form format. Firms with higher risk and/or cost investments may benefit from the ability to combine risk-reward information; while flexibility in describing costs may make it simpler to demonstrate the value of certain products to consumers. If firms are able to present this information in a way which is understandable for consumers, whilst remaining clear on potential risks, there may be opportunities to improve consumer outcomes.

“These rules put a far greater responsibility on firms to ensure consumer understanding; that marks a significant change and a substantial risk transfer to firms. It may be the right approach, but it will be a challenge to achieve.”