The FCA's Consumer Duty Consultation: When "Could Affect" Meets "Should Be Proportionate"

The FCA has published its consultation on the scope and proportionality of the Consumer Duty.

Why this consultation exists

When the Consumer Duty came into force in 2023, it was framed simply enough: firms must act to deliver good outcomes for retail customers, tested against four specific outcomes — product and service design, fair value, consumer understanding, and consumer support. But the scope of "affecting outcomes for retail customers" turned out to be extraordinarily broad. It potentially caught any regulated firm whose activities touched retail outcomes even indirectly, which meant a lot of wholesale firms — market makers, custodians, infrastructure providers — found themselves trying to work out whether, and how, a customer-facing regime applied to a business that never spoke to a customer at all.

The FCA's consultation paper (CP) is an attempt to resolve that. It's built around two stated aims: a more proportionate approach that reflects a firm's actual role in the distribution chain, and a reduction in unnecessary cost and complexity, without giving up protection where real risk of harm exists.

Narrowing who the Duty applies to

The most significant proposed change is territorial. Currently, whether the Duty applies to an overseas customer depends on the nature of the activity — a genuinely awkward, fact-specific test. The FCA now proposes a cleaner rule: the Duty will apply to retail market business only where the customer is usually resident in the UK, based on residential address or, for non-individuals, place of establishment. Firms selling both into and outside the UK will only need to apply Duty requirements to their UK-resident customers, though nothing stops a firm choosing to apply the same standard more broadly if that's operationally simpler.

⚠️If a firm discovers that products not intended for UK retail customers have ended up being distributed in the UK anyway, it will need to review and potentially amend its distribution strategy to prevent further UK sales. A distributor that becomes aware of the same thing has to go further — reviewing the relevant transactions under the cross-cutting rules and taking steps to mitigate any harm already caused.

The FCA has also carved out specific exceptions where the Duty will continue to apply regardless of residence: Crown servants posted overseas, pre-paid UK funeral plans, and UK pension business. These read as targeted protections for situations where "usually resident in the UK" would otherwise leave an obvious gap.

Rethinking co-manufacturing

The current rules on firms manufacturing products jointly require a written agreement documenting each party's role. The FCA now proposes scrapping the "co-manufacturer" concept altogether in favour of a principal manufacturer — the firm with substantive control over the design or operation of the product — and a secondary manufacturer, who carries fewer obligations. The documentation duty sits with the principal. Where manufacturing is outsourced, the FCA's working assumption is that the firm doing the outsourcing will usually be the principal manufacturer. Given this may require firms to redo existing manufacturing agreements, the FCA has signalled it may allow a longer implementation window.

New and clarified exclusions

A cluster of activities are proposed to sit outside the Duty's scope entirely, or outside it unless the firm deals directly with retail customers:

Market making, the provision of ESG ratings, and acting as an indirect access provider to UK interbank retail payment systems such as Bacs and Faster Payments would fall outside scope. Merchant acquiring is excluded too, unless the merchant client itself meets the definition of a retail customer for payments purposes — a distinction that will matter for PSPs serving small or sole-trader merchants.

Separately, safeguarding of funds for payment or e-money activity, acting as third-party custodian, and acting as depositary would fall outside scope provided the firm has no direct engagement with retail customers on that activity. Firms providing derivatives that function as a component within someone else's retail product get a proposed exclusion on similar logic. And where a firm provides services within arrangements set by pension scheme trustees, without dealing directly with the underlying scheme members, it will sit outside the Duty — unless the trustees have themselves been categorised as retail customers.

A more workable version of proportionality

Beyond scope, the CP addresses how the Duty operates in practice along a distribution chain, and this is where I think the FCA has listened hardest to complaints from wholesale-facing firms.

On oversight, the FCA proposes making clear that a firm is responsible for its own role and activities, not for policing the compliance of every other firm in the chain, unless separate regulation or contractual terms say otherwise. On reliance, firms will be permitted to reasonably rely on information and representations from other firms in the chain, provided they act in good faith and don't lean on information it would be unreasonable to trust. On vulnerability, the guidance will recognise that a firm's responsibilities toward vulnerable customers can reasonably differ depending on its proximity to that customer — distributors, being closer to the end customer, may carry more direct responsibility than a firm several steps removed.

There's also a new rule aimed at making information-gathering across a distribution chain more proportionate, so firms focus on collecting what's genuinely useful for assessing customer outcomes rather than defaulting to exhaustive requests. And on board reporting — one of the more resented aspects of the current regime — the FCA proposes clarifying that reporting should be commensurate with a firm's actual role, and that a standalone Consumer Duty board report is not required.

Interaction with existing disclosure regimes

The CP also tackles how the Duty interacts with product governance rules like PROD 3 and the disclosure requirements under the Consumer Composite Investments regime. Wholesale firms have told the FCA that the Duty's consumer understanding outcome overlaps significantly with existing disclosure obligations. The FCA's proposed fix is to clarify that, where a firm's role is limited to manufacturing and it meets its applicable disclosure obligations, that will generally be treated as the primary way it satisfies the consumer understanding outcome. The underlying theme running through the CP is

that firms should be judged on the factors genuinely within their control.

What this means in practice

Comments on the CP are open until 18 September 2026, with a policy statement and final rules expected in Q1 2027. For firms currently in the middle of working out where they sit in a distribution chain — which, in my experience, is most wholesale-facing firms touching retail markets in any way — this is worth reading now rather than waiting for the final rules. There will be some initial work in assessing how the proposed changes affect current compliance frameworks, and firms may want to think ahead about whether to take advantage of the revised position on non-UK customers once it lands. But the direction of travel is unmistakably toward lower compliance costs for firms whose connection to retail customers is genuinely indirect.

If you're trying to work out how any of this might affect your own distribution chain analysis, we'd be glad to talk it through.