Overview

The Financial Conduct Authority (FCA) has published Consultation Paper CP26/23 proposing a package of targeted reforms intended to clarify the scope of the Consumer Duty (the Duty) and support its more proportionate application, particularly for wholesale market participants and firms operating within complex distribution chains.
 
Since implementation, the FCA has observed that in some areas the Duty has been applied more widely and intensively than intended – particularly in wholesale markets and complex distribution chains – causing unnecessary cost and complexity without clear benefit for UK retail customers.

The proposals seek to address this by: (i) removing business with non-UK customers from scope; (ii) clarifying where the Duty applies and does not; (iii) clarifying when firms can rely on each other in distribution chains; and (iv) explaining the interaction with existing product governance rules.

Territorial scope

One of the most significant proposals is to limit the territorial scope of the Duty.

The FCA proposes that the Duty should apply only where the retail customer is usually resident in the United Kingdom (based on residential address or place of establishment). This would remove the current position under which certain cross-border business remains subject to the Duty because sectoral conduct rules apply outside the UK. 

For products with a mix of UK and non-UK customers, firms need only comply with respect to UK-resident retail customers. Exceptions apply for pre-paid UK funeral plans, regulated activities relating to UK pensions, crown servants, and non-investment insurance where the insured risk (i.e., the location of the insured property) is in the UK. Firms will still need to implement controls to prevent products intended only for non-UK customers from being sold in the UK.

New wholesale exclusions

The FCA proposes to exclude from scope a range of wholesale-only activities where there is no direct retail customer engagement. These include:

• Merchant acquiring
• Market making 
• Provision of ESG ratings
• Acting as an indirect access provider to UK interbank payment systems
• Provision of derivatives used in a third party’s retail product
• Safeguarding of funds for payment services and e-money institutions where the bank’s role is limited to providing the account to the authorised firm
• Acting as a custodian when contracting with non-retail clients
• Acting as a depository
• Financing arrangements, market information services, and Society of Lloyd’s activities

The FCA also proposes to maintain but clarify the £50,000 minimum investment exclusion, confirming it applies per investment and per end investor without aggregation across platform or nominee arrangements.

The effect of the exclusion is that activities relating to a financial instrument with a minimum investment of at least £50,000, assessed per investment and per end investor, fall outside the scope of the Duty; the FCA’s clarification makes clear that individual investments cannot be aggregated across platform or nominee arrangements in order to meet the threshold.

Distribution chains and reasonable reliance 

The FCA proposes to clarify that firms are responsible only for their own role and activities in the distribution chain and are not expected to oversee the manner in which other firms comply with the Duty (unless they are otherwise required by regulation or contract to do so). Firms may place reasonable reliance on information and representations from other firms unless to do so would be unreasonable. Information-gathering obligations would be limited to data that genuinely helps firms assess retail customer outcomes.

Principal and secondary manufacturers

The proposals replace the previous “co-manufacturing” terminology with a new principal and secondary manufacturer framework.

Under the proposals, principal manufacturers would remain responsible for the full range of applicable Duty obligations, whereas secondary manufacturers would be subject to a more limited set of responsibilities focused on ensuring that their contribution does not create foreseeable consumer harm or undermine product value.

The FCA also proposes that the respective responsibilities and contributions of manufacturers should be documented through written agreements, although it is consulting on transitional arrangements given the potential volume of existing contractual relationships.

Governance and board reporting

The FCA proposes to clarify that firms can take a more proportionate and practical approach to board reporting. Standalone, discrete board reports dealing with Duty-related matters will not be required. Instead, reporting may be incorporated into existing governance reporting, provided it is commensurate with the firm’s role, activities, and size, as well as the risk of harm. Proportionate reporting should still occur at least annually, with appropriate escalation channels for material issues.

Impact

These proposals represent a sensible and welcome development. Since the Duty came into force, there has been considerable confusion, particularly among firms operating earlier in the distribution chain or without direct customer relationships, as to how they were expected to comply with requirements that were principally designed with retail customer-facing firms in mind. The resulting uncertainty led many firms to adopt an overly cautious approach to compliance, with limited corresponding benefit for retail customers. 

By providing greater clarity on the scope of the Duty and firms’ respective responsibilities within distribution chains, the FCA’s proposals should reduce uncertainty and support a more proportionate application of the Duty, leading to reduced compliance costs for firms.

What should firms do now?

Although the proposals are subject to consultation, firms should begin considering the potential implications for their business models.

In particular, firms may wish to assess:

• whether their activities fall within the proposed new exclusions, particularly wholesale-only firms and those operating in complex distribution chains;
• whether current governance and board reporting arrangements can be streamlined in light of the proportionality clarifications; and
• the impact of the principal/secondary manufacturer framework on existing manufacturing or distribution agreements.

The consultation closes on 18 September 2026, with the FCA expecting to publish its final policy statement and any associated rule changes during Q1 2027. 

Client Alert 2026-150