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6 December 20249 minute read

Retail Disclosure Regime

Introduction

The long-awaited Consumer Composite Investments (Designated Activities) Regulation 2024 entered into force on 22 November 2024 (the CCI Regulation).

The CCI Regulation creates a regime for consumer composite investments (CCIs) and gives the UK Financial Conduct Authority (FCA) the power to develop and deliver a new retail disclosure regime for CCIs, which is intended to replace the UK PRIIPS regime. Subject to the upcoming FCA consultation (expected shortly), HM Treasury expects the new retail disclosure regime to be in place by H1 2025.  

 

What is this about?

In summary:

  • The CCI Regulation designated certain activities as designated activities, and firms conducting such activities will fall within the scope of the new retail disclosure rules;
  • The FCA is given the power to design and implement the new retail disclosure rules, which will sit within the FCA Handbook. The Key Information Document (KID) will be abolished as HMT and FCA "intend for the new regime to be less prescriptive than PRIIPs, providing flexibility for firms to tailor their disclosure to enhance retail investors understanding". This is consistent with the approach introduced by the FCA under the UK consumer duty regime and represents a real divergence in the approach from the EU with respect to retail disclosures;   
  • The CCI definition broadly mirrors the UK PRIIPS criteria but there are some differences and certain definitional concepts that will need to be clarified by the FCA in the upcoming FCA consultation paper;
  • The CCI Regulation also establishes civil liability for breaches of the retail disclosure regime; and
  • The territorial scope of the new regime is broad and will impact firms that conduct designated activities with UK retail investors whether they are FCA regulated or not, and regardless of whether they are based in the UK or not.

 

Who is in scope?

The CCI Regulation identifies the following activities as designated activities which will require firms to provide clients with certain disclosures:  

  • Manufacturing a CCI made available to a UK retail investor;
  • Advising on a CCI if the advice is given to a retail investor or potential retail investor located in the UK, or an agent;
  • Offering a CCI to a retail investor located in the UK; and
  • Selling a CCI to a retail investor located in the UK

The scope of the regime is intentionally broad as:

  • manufacturing a CCI means not only creating, developing, designing, issuing, managing, operating or carrying out a CCI but also making changes to a term, condition or feature of a CCI;
  • the activity of "offering a CCI" is intended to capture communications that provide sufficient information on the CCI to be offered, and the terms on which it is offered, to enable a person to decide to buy the CCI. How this designated activity is intended to interact with the UK financial promotions regime will hopefully be clarified in the upcoming FCA consultation paper; and
  • the previously published FCA guidance on the meaning of the term "made available" does not appear to be incorporated into the CCI Regulations but rather is intended tobe clarified by the FCA in the upcoming FCA consultation paper. This will greatly assist firms in understanding the scope of the new regime.

 

What is in scope?

The CCI Regulation introduces the concept of a CCI. The definition of a CCI broadly tracks the definition of a PRIIP under the current UK PRIIPs and the products excluded from the CCI Regulations largely mirror the products excluded from the scope of UK PRIIPs. However, they are not exactly the same and so firms will need to carefully review the definition and exclusions, and any guidance provided by the FCA in the upcoming consultation paper to determine the precise application. In due course, firms should be undertaking an assessment of the application of the new disclosure regime with a clear record of the rationale for any determination made in relation the firm's products, services and activities.    

In a welcomed development, the CCI Regulation explicitly contemplates the exclusion of debt securities (corporate bonds) from the scope of the new retail disclosure regime, although the precise application of this exclusion is to be determined by the FCA in the upcoming consultation.    

 

Investment Trusts

In response to feedback from market participants, UK listed investment trusts1 have been explicitly excluded from UK PRIIPS and the costs and charges disclosure requirements under Articles 50 and 51 of the UK MiFID Org Regulation have been disapplied by virtue of amendments made to UK PRIIPS by the Packaged Retail and Insurance-based Investment Products (Retail Disclosures) (Amendment) Regulations 2024 (SI 2024/1204). However, this is merely a temporary reprieve as investment trusts will be within the scope of the new UK retail disclosure regime.

In the meantime, this means that investment trusts and persons advising on, selling, or offering shares in investment trusts will no longer be required to provide a KID to retail investors, and will not have to provide a single aggregated figure of costs to clients as required in Articles 50 and 51 of the UK MiFID Org Regulation.

That said, firms conducting activities in relation to investment trusts will continue to be subject to various other FCA rules and requirements, including under the consumer duty, suitability assessments rules in COBS  and the fair, clear and not misleading requirement. This may mean that where a decision is taken not to provide a KID for an investment trust, firms may need to consider providing additional product information to retail clients to meet existing regulatory requirements, and it will be important to agree the approach across the full distribution chain to ensure that the investment trust can continue to be offered and distributed without interruption (taking account of systems and operations changes and impacts). 

 

The end of the road for the KIDS?

The term "retail disclosure” is a catch-all term, which is intended to include information provided to clients on such matters as the features of individual products, warnings about particular areas of risk associated with products, costs and charges of products, activities and services, the terms on which a firm provides its services, as well as and reports on assets and cash held for clients.

At present, the disclosures regime for PRIIPS are set out in the KID, however, the prescriptive form and contents requirements contained in the KID , along with the prescriptive methodology requirements  for calculating cost, risk and performance, will not form part of the new retail disclosure regime as the government and the FCA are of the view that the current disclosure regime is too long, too detailed and too complex, and that this has resulted in consumers being overwhelmed rather than better informed.  

This move away from standardised mandated reporting templates is in line with the approach adopted by the FCA under the UK consumer duty regime but it represents a meaningful divergence from the approach adopted in the EU (including the proposed requirements contemplated by the upcoming EU Retail Investment Strategy and reform). Firms who operate across both jurisdictions will need to consider the operational impact of this growing divergence between the UK and the EU and operational and reflect this across business lines and products that straddle the UK and the EU. 

 

Housing the new rules

In line with the objectives of the "smarter regulatory framework", the new retail disclosure rules will be developed by the FCA and set out in the FCA Handbook. They will be designed with the needs of the UK market in mind, including reflecting the definition of retail investors as it appears in UK domestic law.  

 

Liability issues

The CCI Regulation expands the scope of civil liability to capture disclosures made to retail investors who can demonstrate loss. In this regard, this liability will apply to all firms conducting a designated activity.  Firm should carefully review and scrutinise client communications prepared pursuant to this new regime to mitigate the risk of liability and ensure proper governance and oversight of such communications are embedded into the form's procedures.    

 

Transitional Provisions and Extra-Territoriality Scope

The territorial application is broad but the CCI Regulation establish a temporary exclusion for not only, operators of UK undertakings for collective investment in transferable securities (“UCITS”) but also operator of EU UCITS as well as non-UCITS retail schemes until 31 December 2026.

 

Next Steps

The FCA intends to consult on the new disclosure rules shortly. It will be important for firms to actively engage with the consultation process to ensure that a sensible outcome is reached and that key concepts are clearly defined to ensure that the scope of the regime is properly understood.  

In preparation for the new disclosure regime, firms should: (a) review their existing products and services to determine which fall within scope;  (b) develop an approach to determining the communication and disclosure needs of customers across the various products and service lines that fall within scope (this may entail some interaction with clients that could be informed by assessment made by firms as part of the consumer duty implementation process); and (c) prepare to make changes to communications, disclosures, polices and procedures. The approach adopted by firms to comply with the disclosure and communication requirements, as part of the implementation of the UK consumer duty regime, will be a useful starting point in this regard.   

 

How can DLA Piper help?

DLA Piper can assist and support firms as follows:

  • assist firms determine the precise scope of the new regime (from a product, services and activities perspective) and whether there are any differences from UK PRIIPS;
  • assist firms develop a methodology and process to assess and determine the disclosure and communication needs of clients;
  • Assist firms in developing an approach to disclosures and client communications;
  • Assist firms with updating client communications and disclosures;
  • assisting with developing and drafting the policies, procedures and governance controls In relation to the new regime; and
  • providing training to staff.

If you have any questions in relation to the new regime, please contact Karen Butler.

 


1 For these purposes, an investment trust means a UK-listed closed-ended investment company that invests pooled funds in assets seeking to spread investment risk and generate profits for its shareholders.