Consumer composite investments: FCA proposes new regulatory framework

In its 2024 Financial Lives Survey the Financial Conduct Authority (FCA) identified that 23% of UK adults hold a consumer composite investment (CCI), ie, where the returns are dependent on the performance of or changes in the value of indirect investments.

This includes, for example:

•  structured deposits
• open and closed ended-funds
• contracts for difference (CFDs)
• insurance-based investment products (IBIPs)
• other complex products like derivatives.

The regulator has since identified a need to prioritise good outcomes for these consumers through empowering people to make effective, timely, and properly informed decisions, and to enable firms to tailor their communications. To this end, on 19 December 2024, the FCA published its consultation paper (CP 24/30): a new product information framework for CCIs. It's intended to improve the existing packaged retail and insurance-based investment products (PRIIPs) disclosure regime.

The FCA’s vision for CP24/30

The new CCI framework is intended to build upon the FCA’s Consumer Duty (in force from 31 July 2023) and the regulator’s focus on firms delivering good outcomes for customers. The previous regime was highly prescriptive, while the FCA’s proposed CCI framework aims to be more flexible, straightforward, and focused on empowering customers to make effective, timely, and well-informed decisions.

The proposals follow the Treasury’s commitment to replace the EU-inherited PRIIPs regulation with a new framework for CCIs.

The consultation follows the UK Government passing legislation on 21 November 2024 to replace the PRIIPs regime and UCITS disclosure requirements, including overseas funds in the Overseas Funds Regime (OFR). All CCI product information rules will therefore be contained within the FCA Handbook under the new framework.

The draft rules also include some explicit exclusions to the type of investment that would be covered by the new framework, for example, pension products and pure protection products of insurance.

Redefining the CCI regime

The proposal outlines significant changes to the requirements for how product information is presented, moving away from the rigidly templated format of PRIIPs and the UCITS Key Investor Information Document (KIID). This is because the FCA believes these templates fail to allow firms to tailor communications to meet the needs of retail investors.

The key principles for the CCI regime are outlined below:

• 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

However, the FCA has set out some detailed prescriptive requirements to ensure consistency and comparability across the market to help consumers. The FCA’s primary concerns of the existing mandatory templates relate to three areas.

Costs and charges

The current inflexible methodology may drive inaccuracies by conflating explicit charges with different costs which non-PRIIPs competitors might not have to disclose. This means that consumers can't make effective decisions as they're not being presented with decision-useful or comparable information.

Risk

Current methodologies for calculating risk are inflexible and don't account for all risks of various products.

Performance

Uniformity of performance information across all products results in misleading perceptions in some cases. The requirement to use only a narrative description can prevent sufficient context being provided to investors.

Prescriptive requirements

Disclosures will consist of three core metrics: costs and charges, risk, and performance, along with key general information on the product.

Costs and charges

The FCA proposes standardised and prescriptive costs and charges methodologies for manufacturers across all markets, with flexibility for amendments based on the idiosyncratic characteristics of some product types. It also proposes that manufacturers aggregate recurring costs, to ensure they're presented in a simple format consumers can understand and use to make decisions.

By implementing rules that present costs and charges in a simple, aggregated format, customers will be able to compare the charges and choose which product can offer them the best-value fee. While costs and charges will need to be presented on an aggregate basis, firms should be able to demonstrate that they understand each component at a granular level.

Risk

The FCA proposes to change the initial calculation of risk score by manufacturers to a methodology based on standard deviations and presented on a linear 1-10 scale, aligned with the UCITS Synthetic Risk and Reward Indicator (SRRI). It also proposes to implement a minimum risk score for certain high-risk products and those with unknown volatility, along with a narrative identification of key risks.

By implementing clearer and more appropriate risk information, customers will be able to make better comparisons across all products in scope of CCIs and assess products against their own risk tolerance.

Performance

The FCA proposes that, where possible, manufacturers provide past performance of products graphically and a narrative description of the key factors that determine the performance of a product as part of a risk and reward narrative.

By implementing a narrative and quantitative approach to performance indicators, customers will be better able to correctly interpret information.

Lowering the ‘made available’ threshold

The FCA proposes to reduce the ‘made available’ threshold to £50,000 from £100,000 as it considers this value more accurately represents the maximum denomination of a product intended for the retail market.

The current PRIIPs regime defines the concept of ‘made available’ as when a product is considered potentially accessible to retail consumers regardless of the manufacturer intent, including through secondary markets.

By lowering the exemption threshold from £100,000 to £50,000, manufacturers will be required to provide disclosure information for fewer products that weren't intended to be sold to retail investors but could, in theory, be 'made available' on secondary markets.

Non-retail products

The proposal outlines that the CCI regime would apply wherever a consumer composite investment is 'made available' to retail investors. The FCA also plans to implement rules exempting the CCI requirements for readily realisable securities that meet the following specific criteria:

• the marketing materials (including prospectus, where relevant) feature clear and prominent disclosures that the product isn't intended for retail investors, and the CCI is only being offered to professional clients/eligible counterparties
• the issuer has taken reasonable steps to ensure the offer and associated promotional communications are directed only at non-retail investors
• a minimum investment of £50,000 applies for each end-investor.

Responsibility throughout the distribution chain

The FCA is proposing that the manufacturer creates a product summary containing the key information retail investors need about a product. Manufacturers will also provide underlying core information to the distributor to support the delivery of that information in a more interactive or engaging way.

Distributors may also use the core information from the manufacturer to create their own, more tailored product summary or provide additional product information to support understanding.

Manufacturers and distributors would each be responsible for the product information they prepare. The FCA expects firms to work together to ensure the information needs of retail investors are met, and to remain alive to potential issues with product information, whether they prepared it or not.

Firms will be given the choice about how and when they communicate in line with their requirements under the Consumer Duty. Under the Consumer Duty (specifically PRIN 2A.5), the FCA expects firms to provide information in a format that's best understood by their target market. This may include layering of additional information and interactive disclosures.

What firms can do now

Firms should familiarise themselves with the proposed changes and identify any compliance gaps. Manufacturers of CCI products must assess how to update their systems to meet the new disclosure requirements and calculation methodologies. Distributors, on the other hand, will need to ensure they disclose information to customers in a way that complies with Consumer Duty requirements.

The deadline for providing feedback to the FCA’s consultation is 20 March 2025. The regulator is also carrying out consumer-testing of its proposals as it continues to assess their understanding of key product information. The results of this testing will be used alongside feedback to inform the final rules. A Policy Statement with the final rules will be published later in 2025.

For support in navigating these proposed changes, contact Jonathan Charles or Edward Binks.

FCA consults on operational resilience and third-party reporting

Read this article