The FCA proposes moving away from the PRIIPs KID to a more flexible, technologically neutral regime, which allows firms to innovate and prioritise good customer outcomes.

By Rob Moulton, Nicola Higgs, Becky Critchley, Sidhartha Lal, and Charlotte Collins

On 19 December 2024, the FCA published a consultation on its proposed rules for the new Consumer Composite Investments (CCI) regime (CP24/30). As part of the Edinburgh Reforms, the UK government committed to repealing the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation and replacing it with a UK-specific retail disclosure regime (see this Latham publication). The overall aim is to move away from a prescriptive regime that has raised some serious issues in terms of its broad scope and potentially misleading disclosures, to a more outcomes-focused framework.

The key tenets of the CCI regime are contained in secondary legislation that was made in November 2024 (The Consumer Composite Investments (Designated Activities) Regulations 2024). The legislation provides the definition of a CCI, along with some explicit exclusions. It also sets out the relevant designated activities under the regime and grants the FCA power to make rules for the new framework. This consultation marks the FCA’s first step in creating the detailed rules envisaged by the high-level legislation, and as such is the first real chance to understand the full detail of the new regime.

Scope of the Regime

CCI – Products in Scope

The legislation defines a CCI as:

(a) an investment;

(b) a contract of insurance; or

(c) any right to or interest in anything listed in sub-paragraphs (a) or (b),

where the value or amount payable to the investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the investor.

Helpfully, the FCA proposes to expand on the broad definition of a CCI in its rules by clarifying the products it envisages to fall within scope:

• Structured deposits
• Structured products — securities which embed a derivative, or include features equivalent to a derivative contract
• Debt securities that are currently classified as PRIIPs (in DISC 2.2)[1]
• Securities issued by open-ended funds, or rights to or interests in such securities
• Securities issued by closed-ended investment funds (including investment trusts and venture capital trusts)
• Contingent convertible securities
• Contracts for Difference
• Insurance-based investment products (with-profits polices, unit-linked policies, and Holloway sickness policies)

CCI — Exclusions

• Pension schemes
• Deposits that are not structured deposits
• Pure protection contracts
• Long-term insurance contracts where benefits are only payable on death or sickness

Acknowledging the difficulties issuers face in ensuring that listed securities intended for non-retail investors are not sold to any retail investors, the FCA intends to add rules to disapply the CCI requirements when an offer of readily realisable securities meets all of the following criteria:

• The marketing materials (including prospectus, where relevant) feature clear and prominent disclosures that the product is not intended for retail investors, and the CCI is only being offered to professional clients or eligible counterparties
• The issuer has taken reasonable steps to ensure the offer and associated promotional communications are directed only at non-retail investors
• A minimum investment of £50,000 applies for each end-investor

Activities in Scope

The CCI regime leverages the new UK Designated Activities Regime. Therefore, as with the PRIIPs regime, FCA authorisation will not necessarily be required to carry out any of the designated activities in relation to CCIs (although some, such as advising on and selling CCIs, may also be regulated activities and require authorisation on that basis). Rather, anyone carrying on designated activities in relation to CCIs must comply with the related rules set by the FCA, regardless of whether or not they are authorised. The legislation provides for the following designated activities under the CCI regime (which apply regardless of where the person performing the activity is based):

• Manufacturing a consumer composite investment which is, or is proposed to be, made available to a retail investor located in the UK
• Advising on a consumer composite investment if the advice is given to:
  • a retail investor located in the UK; or
  • an agent for that investor
• Offering a consumer composite investment to a retail investor located in the UK
• Selling a consumer composite investment to a retail investor located in the UK

Under this regime, unauthorised manufacturers would be required to meet basic UK product governance standards, including a product approval process, ensuring that a CCI is designed to meet the needs, characteristics, and objectives of its target market, that it will provide fair value, that its risks to investors are assessed, and that the product’s distribution strategy is appropriate. Unauthorised manufacturers would also have to comply with rules equivalent to Principles 1, 2, 3, 10, and 11 of the FCA’s Principles for Businesses. This would mark a significant uplift from the current PRIIPs regime, as the FCA is proposing to apply some substantive additional regulatory compliance requirements on unauthorised persons and on non-UK firms that fall in scope of the CCI regime. The rules do not propose to apply the requirement concerning fair value in respect of funds which are recognised schemes.

Roles of Manufacturers and Distributors

Manufacturers

The obligations of manufacturers under the proposed regime can be summarised as follows:

1. Calculate core product information in line with detailed methodologies in FCA rules. Core information disclosures would include basic information on the CCI, as well as more standardised information on costs and charges, risk, and performance.
2. Prepare a machine-readable file.
3. Produce a product summary for each CCI.
4. Publish the machine-readable file and product summary on a publicly accessible website.
5. Share additional detail with distributors and respond to feedback from distributors.
6. Ensure the product summary and underlying core information that manufacturers produce remain accurate as long as a CCI continues to be distributed to retail clients. Manufacturers would need to review and update their product summary and core product information as necessary, and at least every 12 months. Manufacturers must also flag any material changes in the product information to distributors.

Co-Manufacturers

In line with the existing UK product governance regime, the FCA recognises that multiple firms may be involved in manufacturing activities. In this case, the firms’ respective roles and responsibility for producing product information should be agreed between the parties.

Distributors

The obligations of distributors under the proposed regime can be summarised as follows:

1. Review product information and product summary prepared by the manufacturer. This would include verifying that the product summary remains up to date.
2. Decide whether additional explanatory information is appropriate to support consumer understanding.
3. Decide whether to use the manufacturer’s product summary or amend it. If distributors create their own product summaries, they would be responsible for ensuring these contain all required information and otherwise meet all regulatory requirements.
4. Communicate relevant information to customers pre-sale. Note that this requirement would not be relevant in the case of discretionary managed distributions or reverse enquiries (however, if a consumer has approached the firm, they would still receive a copy of the product summary and be encouraged to consider it).
5. Provide a durable medium[2] product summary to customers after every sale.
6. Share feedback and information with manufacturers on their communications and products.

Proposed Disclosure Obligations

The FCA proposes that the CCI product summary would replace the PRIIPs KID and UCITS KID. Manufacturers and distributors would need to ensure that the product summary contains certain prescribed information:

• Issue date
• Investment objectives
• Investment policy
• Information about risk
• Past performance
• Costs and charges
• Financial Ombudsman Service / Financial Services Compensation Scheme eligibility

However, many will consider this a vast improvement on the rigid PRIIPs KID format, which has been criticised for causing misleading information to be communicated to retail investors in some instances.

The FCA summarises the proposed changes to disclosures, as compared with the current PRIIPs KID regime, as follows:

Aspect	UK PRIIPs KID	CCI regime
Document and format	Key information Document (KID) in a standalone document with specified format/template. Maximum three sides of A4. Provided at point of sale.	Firms have freedom to design product information, removing format and template requirements. Provided early in the consumer journey. If a sale is made, firms provide a record in a durable medium which could take various forms.
Cost information	Any direct and indirect costs associated with an investment in the PRIIP, including one-off costs, recurring costs, and incidental costs. A reduction in yield table showing the total impact of costs over time. It must be presented over three different holding periods as a single number in percentage and monetary terms.	Performance fees and carried interest explained using narrative and examples. Changing reduction in yield to summary costs over a 12-month period. Flexibility for firms to describe what costs mean and their impact on returns.
Risk information	1-7 risk metric based on credit and market risk, defined by the Cornish Fischer expansion. Risk information that is separated from information on performance.	1-10 risk metric based on product volatility. Flexibility to change risk indicator based on key risks or product features such as capital guarantee. Combined risk-reward information to help consumers understand the features of products.
Performance information	Descriptions of the factors that are likely to affect the performance of a product both positively and negatively, and the impact they may have on its returns.	A past performance graph covering a 10-year period (where this is available), to visually help consumer understanding and to provide more contextual information to consumers.

In relation to multi-option products, the FCA is proposing to maintain the flexibility which allows providers to produce a general summary of the wrapper, with product information for each of the underlying products, or an overarching product summary that covers the product as a whole.

Costs and Charges

The FCA’s proposed rules apply only to the calculation and presentation of product costs. Distributors’ existing obligations relating to costs and charges for the investment services they provide would remain unchanged.

Manufacturers would need to adhere to prescriptive and standardised methodologies, which can then be amended dependent on the “idiosyncratic” characteristics of some product types. The proposed costs and charges requirements can be summarised as follows:

• Provide distributors with the product’s aggregated ongoing cost percentage for each CCI
• Summary cost illustration must show product costs over a single holding period:
  • Consists of entry costs, exit costs, ongoing costs, and transaction costs
  • Presented as a percentage and as GBP figures over a 12-month period
  • £10,000 as the representative investment, or £1,000 each year for CCIs with regular contributions
  • Performance fees or carried interest are not included in this figure
• A baseline cost methodology for all products and specific considerations for certain product types. Firms must disclose all direct and indirect costs and charges associated with a product. The types of costs and charges to disclose would remain broadly unchanged from existing requirements:
  • One-off entry, one-off exit, ongoing and transactional costs, each of which would need to be calculated and disclosed as a percentage figure, alongside an aggregated summary of these costs
  • Performance fees and carried interest, which would need to be identified and explained in easily understandable language
• Transaction costs: While firms should calculate and disclose transaction costs for CCIs, the FCA will consult on amendments to the existing methodology (used under the PRIIPs regime) in early 2025
• Ongoing costs: Requirement to present a single, aggregated ongoing costs percentage for CCIs. The FCA is not proposing to require that specific ongoing cost components must be highlighted to investors
• One-off and other costs: Requirement for separate disclosure of any one-off entry or exit costs, contingent costs like performance fees and carried interest, and transaction costs:
  • Transaction costs should be disclosed separately to other ongoing costs
  • Performance fees or carried interest should be communicated through a simple explanation of how the performance fee is structured, alongside a practical example of what this fee could amount to

Risk

In relation to risk, the FCA proposes that the 1-7 risk metric defined by the Cornish Fischer expansion be replaced with a 1-10 risk metric based on product volatility, along with descriptions which balance the material risk and potential rewards to provide a more holistic picture. The FCA considers this should help correct issues experienced with the current PRIIPs Summary Risk Indicator. The FCA proposes a minimum risk score for certain products that are deemed high-risk or those of unknown volatility.

Past Performance

Finally, product summaries would need to present past performance of products in a standardised graphic manner covering a 10-year period (or all that is available, if less than 10 years), if relevant past performance data is available. General information about the key factors that determine the performance of the product would need to be provided for all products.

Next Steps

The deadline for comments is 20 March 2025, and the FCA plans to publish a further consultation on draft rules for consequential amendments and transitional provisions early this year. The regulator aims to issue a Policy Statement with final rules at some point in 2025. In the meantime, the FCA highlights that it will be carrying out consumer testing and engaging extensively with stakeholders to ensure its proposals work as intended. The FCA intends for the regime to come into force when the Policy Statement is published, subject to a proposed 18-month transition period. During the transition period, the FCA plans to allow anyone subject to the regime to follow either the new CCI rules or the PRIIPs rules (as they apply immediately before their repeal).

---

[1] The FCA has confirmed that it does not consider that a typical “make whole” clause causes corporate bonds to fall within scope of the CCI regime. The regulator proposes to amend the existing scope clarifications to remove the current requirement for a link between the exercise of a “make whole” option and some other event or state of affairs, and to broaden the scope of the possibility of mechanisms for calculating the cash repayment amount to ensure that this does not inadvertently exclude certain “make whole” provisions.

[2] In line with its “digital first” approach, the FCA recognises the need to support initial communications with customers via a non-durable medium. Therefore, firms can send the product summary by email following a CCI sale conducted online. The FCA is looking at the definition of durable medium to see if it serves as a barrier to good customer outcomes.