Conclusions pending: FCA reports on the application of the Consumer Duty to wholesale firms

Back in July, the government asked the FCA to report to it on the application of the Consumer Duty to wholesale firms. This followed concerns raised in a number of fora (including the House of Lords Financial Services Committee) about whether the Duty had imposed unnecessary burdens upon wholesale firms and the uncertainty its introduction has caused domestic and international firms alike. The government also asked the FCA to provide certainty on the categorisation of professional clients.

The FCA published its response on 30 September 2025.

Its letter to HMT was accompanied by an update on its broader ‘streamlining’ project, following last year’s Call for Input (“CFI”) on where regulation could be streamlined in favour of reliance on the Duty. The FCA last reported on this workstream in March. Completing the trio, there was also a new list of consumer duty focus areas for 2025/26. 

These documents demonstrate the FCA ongoing efforts to balance its consumer protection objectives with government requests to foster growth.

Application of the Consumer Duty to wholesale firms.  

The application of the Duty to firms without direct relationships with retail was a deliberate move by the FCA, which was determined that the regime would apply across the product distribution chain. However, many wholesale firms feel that insufficient thought was given to how the Duty would apply in practice to the full range of their operations. Key concerns here include:

• Duplication. Wholesale firms were already well-regulated - there is an argument that the Duty has made little difference to the obligations on such firms, other than adding a considerable number of new administrative burdens.  
• The operation of the distribution chain. Most wholesale firms have no direct relationship with retail customers. Information about retail customers’ experience of products does not always flow smoothly from distributors and many firms are uncertain about the FCA’s expectations here.
• The potential (or otherwise) for the Duty to bite on B2B services and need to demonstrate that activities have no material influence over outcomes for end retail customers.
• Challenges applying the Duty to customers overseas. This adds costs which may reduce firms’ international competitiveness.

The letter outlines the conclusions of the FCA’s summer of engagement with stakeholders and its proposed next steps to address their concerns. 

The FCA accepts that some firms have taken “steps to comply driven by uncertainty about our expectations and concern about the consequences of getting it wrong,” but maintains that “driven by their compliance and legal advisers, [firms] appear to have taken an unduly narrow or administrative approach….increasing their compliance costs unnecessarily.”  It makes no practical, fiscal or operational sense for firms to be ‘unduly’ prescriptive about financial regulation.  If firms have gone further than the FCA intended, its expectations cannot have been clear on the face of its rules. 

The FCA’s proposed action plan includes:

• By the end of 2025:
  • Further clarity (likely guidance) on its approach and expectations under the Duty when firms work together to manufacture products for retail customers.
  • A consultation on plans to update the client categorisation framework. This is intended to allow investors with sufficient knowledge, experience and resources not to need retail protections to opt up. It may be accompanied by a new test at a high threshold of assets.
• In the first half 2026:
  • A consultation on changes the Consumer Duty rules, to make it “clearer for firms where the Duty applies and how we can draw a clearer line when it doesn’t.” This will include considering whether there is a case for further exemptions.
  • Remove business with non-UK customers from the scope of the Duty.

Reflections

• The lack of pace - or any really new ideas - is disappointing. Clarification of the FCA’s product governance rules and the Consumer Duty's operation throughout the supply chain was proposed in the FCA’s March feedback statement on simplifying FCA rules, which also hinted at reducing or removing the overseas application of the Duty. The FCA announced in July that it would be reviewing its client categorisation rules. Any truly new initiatives here will not, therefore, even be consulted upon until the middle of next 2026, with firms are likely to have to wait at least year to see any substantive changes. Our understanding is that stakeholders have provided plenty of evidence of their concerns during discussions with the FCA over the summer, but without the detail in the promised CP on possible changes to the Consumer Duty rules, it’s impossible to say whether the FCA has really grasped firms’ concerns here. The regulator should be encouraged to move faster.
   
• Picking up on the suggestion of ‘undue prescription’ discussed above, it seems strange that the FCA should be obliquely criticising firms for applying a regulatory framework imposed upon them too strictly. If firms’ application of Consumer Duty rules to wholesale activity has had unintended results, the onus is surely on the FCA to ensure those rules are better suited to the sector. The FCA has been at pains to understand how the Duty might apply to the specifics of regulated cryptoasset activity, for example, before applying any new rules on that sector. A similar approach to the wholesale sector before implementation could have saved firms a lot of time and money.
   
• Finally, the FCA uses its letter to reiterate its “longstanding expectation” under its product governance rules that “manufacturer firms are responsible for their work to design and operate retail products,” citing historic cases of consumer harm where firms higher in a distribution chain did not adequately consider the interests of end consumers. Many wholesale firms are, however, looking for a clearer explanation of additional steps FCA expects them to be taking now the Duty is in force that they were not taking before. Any firm manufacturing products under MiFID, for example, applied the PROD rules before the Duty came into force, and continues to apply those rules now.  Their approach to product governance is essentially unchanged. The FCA has yet to make a positive case for the application of the Duty in this context, particularly where manufacturer firms have no direct relationship with retail. 

We wait with interest to see if next year’s CP on potential rule changes delivers what wholesale firms are looking for here.