FCA plans product information reforms for consumer composite investments

Below, we look at which firms – and products – will be subject to the CCI regime, its potential relevance for foreign firms not directly subject to FCA regulation, and at how product information requirements for CCIs are set to differ compared to PRIIPs (165-page / 1.66MB PDF).

What is the CCI regime?

The CCI regime will replace the current PRIIPs regime which was derived from EU law and was assimilated into UK law after Brexit. The PRIIPs regime requires financial services firms manufacturing packaged retail investment and insurance products (PRIIPs) to provide retail investors with key information documents (KIDs).

The main defining feature of a PRIIP is that the amount ultimately payable to a retail investor is subject to fluctuations as result of exposure to values or to the performance of one or more assets which are not directly purchased by the retail investor. The PRIIPs regime has long been criticised for being a one size fits all approach, where different products, ranging from structured products to bonds to investment-based life insurance, are forced into the same detailed regime. Whilst CCI will also apply to a similar wide range of assets, the detail is less prescriptive.

Regulations to underpin the operation of the new CCI regime were made on 21 November 2024. The regulations serve mainly as a framework for the FCA to set out rules and guidelines for the CCI regime, which will only take effect once the PRIIPS regime has been repealed.

Firms in scope of the CCI regime

The statutory instrument is also an example of the new ‘designated activities’ regime, introduced under the Financial Services and Markets Act 2023, which allows the FCA to regulate the activities of firms that are not FCA-authorised. As a result, the CCI will apply in due course not only to UK-authorised CCI manufacturers and distributors but also to offshore CCI manufacturers, such as fund managers subject to the ‘overseas funds’ regime, where they market their funds to UK retail investors and to unauthorised distributors.

Who might be considered a CCI manufacturer?

Manufacturing a CCI means creating, developing, designing, issuing, managing, operating or carrying out a consumer composite investment, or making changes to a term, condition or feature of a consumer composite investment.

This echoes the definition in the consumer duty, which itself is wider than the traditional concept of manufacturer under the EU’s MiFID Directive. We also know from recent headlines that the FCA considers that UK authorised outsourced service providers of IT solutions may be classified as co-manufacturers under the consumer duty alongside the firm that most would regard as the product manufacturer. For unauthorised firms such as an overseas fund manager under the CCI regime, it raises the question of whether the product manufacturer would only be the EU UCITS manager or whether the board of the UCITS, the investment manager or the fund administrator should also be considered a manufacturer because they operate or carry out the product.

The draft rules show that a manufacturer includes a firm which makes a material contribution to the manufacture of a CCI in collaboration with other manufacturers. If that is the case, these co-manufacturers will need to have a written agreement between them. Similarly, there is a question over whether the method of delivery of a product is a “feature” of that product. If it is, a person providing a particular interface could also be a manufacturer. 

The FCA is proposing to impose basic product governance standards on unauthorised manufacturers, requiring them to establish a product governance process, ensuring that a CCI is designed to meet the needs, characteristics, and objectives of its target market, that it will provide fair value, that its risks to investors are assessed, and that the product’s distribution strategy is appropriate.

Who might be considered a CCI distributor?

Distributing a CCI means: giving advice to a retail investor based in the UK, or their agent, on the merits of buying, selling, subscribing for, exchanging, holding or redeeming a CCI, or exercising any right conferred by a CCI to buy, sell, etc a CCI, or entering into an agreement relating to a CCI; or offering a CCI to a retail investor located in the UK; or selling a CCI to a retail investor located in the UK.

This definition of distributing means that even if an overseas firm is able to use an exemption, such as the overseas persons exemption to avoid having to be FCA authorised – something often used by “fly-in/fly-out” overseas firms with limited business in the UK – they will be subject to the CCI regime and will need to comply with these new rules.

Products in scope of the CCI regime

The CCI regime covers a very similar product set to PRIIPs. Products include structured deposits; securities which embed a derivative or include features equivalent to a derivative contract; debt securities with certain features, securities or units issued by a fund including closed-ended funds; contingent convertible securities; contracts for difference; and insurance-based investment products, such certain life insurance policies.

The intention is to embrace the approach of the consumer duty, seeking good outcomes for consumers and trying to ensure that the product summary document will be user friendly for retail investors.

This means, for example, that whilst overseas firms will not become subject to the consumer duty, they will be subject to consumer duty-aligned obligations.

The FCA’s product information proposals

Proposed changes in approach under the CCI include greater freedom in design of the product summary, removing the current format and template requirements of PRIIPs. The product summary will need to be provided early in the consumer journey. If a sale is made, firms will then be expected to provide a record in a durable medium.

Under the proposed CCI regime, costs information would need to include an explanation and narrative and contain examples for performance fees and carried interest. A summary of costs over a 12-month period would also need to be provided, with the flexibility for firms to describe what costs mean and their impact on returns.

Risk information to be provided is also to be reformed, with the FCA proposing to move from the 1-7 risk metric based on credit and market risk, to a 1-10 risk metric based on product volatility. Under its plans, there would be flexibility to change risk indicator based on key risks or product features such as capital guarantee and a combined risk-reward information disclosure to help consumers understand the features of products.

A past performance graph, covering a 10-year period, where available, to help consumer understanding and to provide more contextual information to consumers, would also be required to be provided.

Although CCI manufacturers will create a product summary document including core information, the FCA has proposed to leave it open to distributors to prepare a separate product summary using core information provided by the product manufacturer where the distributor concludes that the manufacturer product summary could be improved upon in order to achieve good outcomes for consumers. This is proposed on the basis that the distributor best knows the target market and what a good outcome as regards communications would look like.

To facilitate this, the manufacturer would be required to provide distributors with core information in machine-readable format that covers basic information for the CCI, such its name, objectives and the availability of redress, and information about each CCI’s costs and charges, risk, and performance according to standardised rules. The core information could also be expanded to include information relating to sustainability disclosures.

To help with the sharing of information that might be required between manufacturers and distributors, the FCA has proposed imposing a co-operation obligation on firms within scope. 

A change to what would be treated as a listed product aimed at retail investors is also proposed. Currently, the threshold to be treated as aimed at retail investors is where the minimum investment is less than £100,000. The FCA has proposed to reduce this threshold to £50,000 and tie it to other conditions too, including that there is a clear description that the listed securities are not intended for retail investors, that the CCI is only being offered to professional clients/eligible counterparties, and that the issuer has taken reasonable steps to ensure the offer and associated promotional communications are directed only at non-retail investors.

Challenges for EU investment firms

EU firms are used to a very prescriptive approach under EU legislation. The outcomes-based approach of the consumer duty in the UK could present a challenge for such firms and may not sit easily with the approach to regulation in their home state. As has already been seen since the consumer duty was introduced, the target market assessment under, for example, MiFID is not the same as assessing the needs, characteristics, and objectives under the consumer duty.

CCI manufacturers not authorised by the FCA also face having to comply with rules equivalent to a number of the FCA Handbook principles, including around integrity; skill, care and due diligence; management and control; client assets; and regulator relationships.

What happens now?

The FCA’s consultation closes on 20 March. It intends to publish its finalised policy statement later in the year, with full implementation of the policy 18 months after that or, in the case of listed companies, 12 months after the policy statement.