Consumer Duty refined: FCA consults on scope and proportionality

The FCA has published its much-anticipated consultation (CP26/23), proposing targeted changes to the scope and application of the Consumer Duty. The proposals are aimed primarily at wholesale and internationally active firms, but will have implications for all firms involved in the manufacture and distribution of products to retail customers. Firms have until 18 September 2026 to respond.

The CP has been published in response to a government commitment articulated as part of the Leeds Reforms. The government asked the FCA to report on how the Consumer Duty applies to wholesale firms, following concerns that its requirements had become unduly burdensome for this sector and were impacting competitiveness. The FCA set out its plans to address these concerns in its September 2025 report, including a commitment to publish a CP on the application of the Duty before the end of H1 2026. These latest proposals follow extensive pre-consultation between the FCA, industry and trade associations.

FCA proposals

The FCA remains committed to the Duty’s core purpose of ensuring an appropriate degree of protection for consumers. Its stated goal is to ensure that the Duty is targeted, proportionate and predictable. Three years on from implementation, the FCA has seen evidence that some firms, particularly those operating in wholesale markets or complex distribution chains, have applied the Duty more widely and intensively than intended. CP26/23 is its response to that concern.

The key proposals are:

• Removing non-UK customers from scope: the Duty will apply only to retail market business where the retail customer is ordinarily resident in the UK, judged by residential address or place of establishment (subject to a very small number of targeted exceptions).
• Clarifying scope: the FCA is proposing clearer rules on which activities fall within the Duty's scope and new worked examples to help firms determine their obligations. It is also replacing the concept of co-manufacturing with a framework of primary and secondary manufacturers.
• New exclusions: several activities, primarily wholesale services provided on a B2B basis, will be explicitly excluded from the Duty. These include merchant acquiring, market making, ESG rating provision, and providing derivatives for a third-party product. Safeguarding, custody, depositary services and support to defined benefit pension trustees will also be excluded, provided the firm providing them does not interact directly with retail customers (subject to a small number of exceptions for specific activities by depositaries).
• Proportionate application: new guidance on how firms working in distribution chains can allocate and rely on each other's compliance, how board reporting requirements can be streamlined, and how obligations around vulnerability and information gathering apply to firms with more limited roles in the distribution chain and/or no direct contact with retail customers.
• Interaction with other product governance rules: the FCA seeks to explain how the Duty sits alongside PROD 3 and the Consumer Composite Investments regime, particularly for wholesale firms that manufacture retail investment products.

Practical implications for firms

The CP is lengthy (275 pages). It includes draft rules and a draft amended version of the current Non-Handbook Guidance. The FCA has redrafted or provided new definitions for some of the foundational concepts under the Duty, including ‘retail market business’, distribution chain’ and ‘product’.  As such, the full implications of the proposed changes require careful consideration. Our initial thoughts are set out below:

• The non-UK customer exclusion is a significant and welcome development for firms with an international footprint. Where the same product is sold inside and outside the UK, the Duty will apply only to UK sales, meaning firms will no longer need to design those products with the needs of overseas customers in mind, monitor outcomes or seek distributor feedback for non-UK business. This neatly resolves an issue that manufacturing firms have had in obtaining feedback from overseas distributors who are outside the scope of the Duty. Although the FCA acknowledged that firms only need to take reasonable steps to obtain feedback from distributors outside the UK, many firms were uncertain about the extent to which they could comply with their own obligations under the Duty without such feedback. Firms will need to review their target market definitions for non-UK products and ensure their distribution arrangements prevent those products from being sold back into the UK.

• The new list of exclusions is helpful, even if some firms will note that clarity on activities such as custody, safeguarding and merchant acquiring is overdue. One of the difficulties of the initial definition of retail market business was that the flexibility of its key concepts and the emphasis on 'looking through’ to retail where firms do not have a direct relationship with end customers left firms uncertain about where distribution chains began and ended. On the wholesale side, firms were spending unnecessary time ‘proving the negative’ to satisfy themselves that they were out of scope.

  • Wholesale firms should review the proposed exclusions carefully against their current activities, to assess whether their existing Duty compliance frameworks can be simplified as a result. Note that depositaries are not entirely out of the woods: the proposed exclusion would not apply where a depositary takes a role in fund suspension or the replacement or appointment of fund managers. Also, transfer agency is currently omitted from the list of suggested exclusions.

     

• The shift from co-manufacturing to a primary/secondary manufacturer framework is a significant change. It will require firms to revisit their existing arrangements. The FCA has included indicative factors to help firms determine whether they are a primary or a secondary manufacturer, but some uncertainty around the boundary between the two categories is likely to remain. Firms engaged in co-manufacturing under the Duty may wish to consider whether the potential shorter-term burden of restructuring these relationships will be worth any longer-term gains and the additional clarity achieved.

   

• On proportionality, the FCA is explicit that no firm needs to police another's compliance; that firms can reasonably rely on information provided by other parties in the chain; and that duplication of effort is not expected.

   

• For board reporting, the FCA has moved from requiring a physical ‘report’ to focusing on ongoing ‘reporting’. Standalone Consumer Duty reports will no longer be required. Going forward, reporting should be commensurate with a firm's size, role in the distribution chain or size of in-scope business. Reporting can also be integrated into existing governance structures where appropriate.

   

• On information gathering, the FCA acknowledges that firms will not always have access to complete data. Firms with more limited roles in a distribution chain may rely on more targeted, qualitative or risk-based monitoring.

   

• In terms of the obligations of manufacturers towards vulnerable customers, the proposals largely reflect existing FCA feedback. It emphasises that manufacturers play a key role in ensuring product design does not exacerbate vulnerabilities within the target market of a product, assessed at a general level. This is a key way in which manufacturers fulfil their cross-cutting obligation to avoid causing foreseeable harm.

  • The CP confirms that manufacturers with straightforward products that present limited risk can rely on distributors to identify and support vulnerable customers and that this will likely be all that is required in terms of managing the needs of this cohort. There is no expectation that manufacturers will identify or respond to individual customer support needs or circumstances. More complex, higher-risk products, untested products and those with a high proportion of vulnerable customers in their target market will require greater ongoing scrutiny by manufacturers, including potential revisions to product design, target market assessments and distribution arrangements where it appears that they are causing harm.

     

• The FCA attempts to articulate what the Duty adds to the current framework of obligations on firms manufacturing porduct under the MiFID PROD rules. It also sets out a case study explaining how substituted complaince with the PROD and CCI regimes can help these firms meet their Consumer Duty obligaitons. Contrary to what we assume was the FCA's intention, many will feel that this case study - which focuses on the activities of a manufacturer of retail structured products without any direct retail relationship - supports the assertion that the Duty adds little in this context.

Next steps

The consultation closes on 18 September 2026. The FCA expects to publish a policy statement and make any new rules in Q1 2027.

The consultation is an opportunity to engage with the FCA to the extent that firms consider that the proposals do not go far enough or introduce new (and unhelpful) complexity.

We will be hosting a webinar to discuss the key proposals and our initial views on their application on 1 July 2026 at 4pm. Please speak to your usual Linklaters contact if you would like to join us.