FCA reviews Consumer Duty – Scope & Proportionality

For a quick overview, click here to read our 2-minute summary.

The FCA has published Consultation Paper, ‘CP 26/23 Consumer Duty – Scope and Proportionality’ (the “Consultation Paper”) in response to evidence that the Consumer Duty has been applied more widely and intensively than intended in some places, particularly in wholesale markets and complex distribution chains. The FCA’s proposals focus on clarifying where the Duty applies, and where it does not, and on ensuring it is applied in a proportionate way. The FCA is seeking comments by 18 September 2026. 

Background

Since the introduction of the Consumer Duty, industry stakeholders, particularly wholesale market participants and firms with international operations, have raised concerns that the Duty’s scope captures certain cross-border and wholesale activities in ways that are disproportionate relative to consumer protection objectives. Industry feedback has also centred on the application of the Duty across distribution chains, saying it has been one of the most challenging aspects of implementation, particularly for firms that are distant from the end retail customer. 

FCA Proposals

The core structure and objectives of the Duty remain unchanged. The package of proposals focus on three key areas:

• Narrowing the territorial application of the Duty to UK resident retail customers;
• Defining the retail distribution chain to clarify which activities will be in-scope of the Duty (confirming certain wholesale activities will be out of scope) and providing more guidance on when firms’ influence over retail customer outcomes will meet the threshold for the Duty to apply; and
• Clarifying roles and responsibilities across the distribution chain and expectations on proportionate application of the Duty.

FCA also seeks to explain the interaction between the Duty and other product governance rules.

Territorial scope: non-UK customers

The FCA is proposing to limit the Consumer Duty to retail market business where the retail customer is usually resident in the UK, based on the customer’s residential address or, where the customer is not an individual, the place of establishment. There are some modifications to this general approach in connection: with non-investment insurance contracts (to reflect the nature of the insurance market and the approach in ICOBS and PROD 4); pre-paid UK funeral plans; and activities relating to UK pensions.

Scope of activities subject to the Duty 

The current scope of the Duty is set by reference to:

• whether a firm conducts ‘retail market business’, broadly regulated and ancillary activities of a firm in a distribution chain which involves a retail customer,^[1] certain exclusions apply;
• key obligations relating to ‘products’ (including services); and
• whether a firm in a distribution chain ‘materially influences’ customer outcomes even where the customer is not a direct client of the firm - distribution chain is currently undefined.

Retail market business

The core definition of retail market business is not changing but proposed new rules expand on the types of activities which will fall in scope where they involve regulated or ancillary activities and relate to products to be offered, provided or sold to retail customers:

• manufacturing (or contributing to the manufacture of) a product or service;
• distributing a product or service;
• setting the price, costs or charges for a product or service or a component part;
• communicating a financial promotion or preparing or issuing customer-facing communications for a product or service; 
• providing pre- or post-sale consumer support for a product or service, including general customer support services.

FCA also includes certain activities which do not fall clearly within the above activities because there is no product being provided to the retail customer, but where there is a clear connection to products sold to retail customers:

• approving relevant financial promotions relating to retail market business;
• provision of credit references or credit information services relating to retail customers; 
• exercise of lender rights and duties under regulated credit agreements; and
• debt administration and debt collection. 

Ancillary activities

FCA is expanding its non-Handbook guidance on the meaning of ancillary activities in the context of the Duty. These activities include ongoing customer support services for a regulated product or service, unregulated products or services that add functionality or otherwise expand the benefits to retail customers of a regulated product or service, or where the unregulated product or service is held out as being for the purposes of the regulated product or service.

Exclusions

Certain specified activities will continue to be ‘excluded business’ for the purpose of the Duty.  Further additional exclusions are now proposed.

Products & Services

The current definition of ‘Product’ broadly includes specified investments and regulated products and services distributed to retail customers, regardless of whether a firm has a direct relationship with the end retail customer.  The essence of this remains the same, although is structured slightly differently under the new proposals with deleted aspects of the definition relating to retail customers now being housed in the amended retail market business definition.

Distribution chains

There is a new definition of ‘distribution chain’ which encompasses the chain of firms engaged in retail market business activities in relation to a product or service to a retail customer. New rules provide examples of arrangements between firms in a distribution chain.

The extent of a firm’s obligations under the Duty depends on what the firm’s actual role is in practice, rather than just what is set out in contractual terms between firms.

• Information sharing & reliance: Some obligations under the Duty require firms to obtain and share information across the distribution chain. FCA expects the detail and scope of information requests to be proportionate to meeting the firm’s obligations. A new rule requires firms who share information with other firms across a distribution chain to take reasonable care to ensure the information can be relied upon and provides that the recipient firm is entitled to place reasonable reliance on the information or representations given. 
  
  Alongside this is new guidance on reasonable and proportionate information sharing across the chain. The emphasis on proportionality is intended to enable firms to focus on requesting information that is genuinely useful to assessing outcomes and to be more targeted in their data sharing. New non-Handbook guidance clarifies that firms should generally focus on themes and trends at a target market level, noting this might be achieved through qualitative focus groups with key partners, and recognises that where firms can demonstrate they have sufficient existing data to monitor outcomes, they don’t necessarily need to gather more information across the chain.
   
• ‘Co-manufacturing’: In December 2025, FCA released a statement to address questions on expectations of ‘co-manufacturers’ under the Duty following feedback that use of this term by the regulator was not always clear. FCA is now proposing rule and guidance changes to remove references to ‘co-manufacturing’. Instead, where there is more than one manufacturer, firms would either be classified as a principal or secondary manufacturer. Firms with substantive control, over the design or operation of the product would be principal manufacturers and other firms, secondary manufacturers. The proposals leave open the possibility that more than one firm could be a principal manufacturer in relation to a product. FCA has provided indicative factors of ‘substantive control’, including the power or ability to make decisions about core aspects of the product design, operation, distribution strategy or value proposition for end retail customers.  The principal manufacturer would be required to set out the contribution of all manufacturers in a written agreement outlining respective roles and responsibilities under the Duty so that these can be readily ascertained by the FCA if any issues arise. Principal manufacturers would have more detailed obligations under the Duty. A secondary manufacturer would be subject to more limited obligations under the products & services and price & value outcomes and in general, less would be expected of them under the cross-cutting rules.
• Firms only responsible for their own activities: New rules and guidance confirm that a firm is not subject to obligations under the Four Outcomes where they are not relevant to the firm in light of their role in the chain and that a firm is only responsible for its own role and activities and not for the conduct of other firms in the chain, unless other regulatory requirements or contracts require it e.g. in the context of outsourcing arrangements.  

Material influence

Many firms have said it can be difficult to assess if their role amounts to having material influence over customer outcomes. FCA is making some minor clarifications confirming a firm will not be in-scope if it has a limited or remote role where it is unable to determine or materially influence outcomes for retail customers. FCA also gives fresh examples in the proposed non-Handbook guidance of where a firm’s role is more limited and so does not exert material influence e.g. where actions are remote from the retail customer and are carried out under a prescriptive mandate set by a professional client independent of the firm, or providing factual information to support the work of another firm in the chain.

FCA says the proposed clarifications on proportionality are designed to move away from the material influence concept and focus more on the firm’s role and the extent of its involvement with a retail product or service. 

Proportionality across the distribution chain

The Consultation Paper has placed a great focus on proportionality following firm feedback. 

• Responsibilities: FCA is proposing to make clear that firms are only responsible for ensuring compliance in their own role and activities and are not expected to oversee the compliance of other firms in their distribution chain, unless other regulation or contracts require this e.g. under outsourcing arrangements. 
• Due diligence: A new limb is proposed to the Handbook guidance on the cross-cutting obligation to avoid causing foreseeable harm: carrying out appropriate due diligence before entering into business arrangements with another firm or accepting introductions in relation to the product. New non-Handbook guidance clarifies firms can take a proportionate approach to the due diligence they undertake commensurate with the potential risk of consumer harm in the product or service. FCA’s proposed guidance includes an example of where a manufacturer assesses overall that a potential distributor has the knowledge and capabilities to sell the product in a way that delivers good outcomes, an in-depth assessment of the distributor’s approach to the Duty may not be needed.
• Reasonable reliance: FCA is proposing to clarify that where a firm’s compliance with the Duty depends on information provided by, or the actions of, another firm in the distribution chain, the firm may reasonably rely on that information and on representations made by the other firm on actions it has taken. Firms would not be able to rely on other firm information where it would be unreasonable to do so e.g. where there are indicators other firms in the distribution chain may be causing consumer harm. 
• Notification obligations: There are also amendments to obligations on reporting other firms in the distribution chain to the FCA, now clarifying that the obligation only applies where a firm has a material concern about the conduct of another firm in the chain. A firm which has identified the concern may, where reasonable, first raise it with the other firm and seek clarification or comfort, before contacting the FCA. The FCA says it expects firms to work together constructively to support good outcomes for retail customers.

Vulnerable Customers

On supporting vulnerable customers, the FCA proposes to clarify rules and add non-Handbook guidance to reflect that firms may act differently depending on their role in the distribution chain, their activities and risk of harm to consumers.  

Manufacturers further removed from end customers should consider risks arising from their own activities such as product design, target market assessments and distribution arrangements – taking steps to mitigate the risk of harm to customers, including vulnerable customers, where appropriate. Firms closer to the consumer, such as distributors, have more direct responsibilities for identifying and responding to customers’ needs and should provide relevant feedback to manufacturers based on their outcomes monitoring. 

For simpler lower-risk products, a manufacturer may conclude good outcomes for vulnerable customers are likely to be secured by distributors that deal directly with the end customer. For more complex products with features that could cause harm to vulnerable customers, or where the target market may include a high concentration of vulnerable customers, manufacturers will need to do more to mitigate the risk of harm when designing product features and carrying out outcomes monitoring and product reviews. 

FCA is clarifying that firms can reasonably rely on others in the distribution chain who interact with customers directly to identify vulnerable customers and provide support. However, firms must not ignore evidence of poor outcomes for vulnerable customers and where those outcomes could be caused by their own activities they should act and/or escalate to other parties in the chain where they are better placed to address the source of harm.

Outsourcing Arrangements 

A firm that outsources an activity retains responsibility and liability for the outcomes received by its retail customers and is accountable for how it undertakes the outsourcing and monitors the outsourced activities.  

Where a firm outsources activities to an outsourced service provider (OSP) that is also an authorised firm, both firms should assess their respective responsibilities under the Duty, focussing on the substance of what they do rather than the contractual arrangements. Each firm is responsible for complying with the Duty in respect of their own role and activities. Where OSPs have a contributing role in manufacturing a product, FCA would generally expect the firm to be the principal manufacturer and the OSP to be the secondary manufacturer but if the OSP’s role extends to shaping key features of a product, then it might also be treated as a principal manufacturer.

The FCA is proposing further non-Handbook guidance on outsourcing arrangements to help firms apply the Consumer Duty in a proportionate manner, avoiding duplication between firms. 

Board Reporting

Some firms have raised concerns that the Duty’s governance expectations have resulted in board reporting that is overly detailed and process-driven. Firms further removed from retail customers have also asked for greater clarity on what the FCA expects from board reporting under the Duty.

The FCA proposes to supplement its non-Handbook guidance to help firms take a proportionate approach. In particular, the guidance would make clear that board reporting should reflect:

• the extent of the firm’s retail market business;
• the firm’s role in the distribution chain;
• the firm’s size and capabilities;
• the risk of harm to retail customers arising from the activities for which the firm is responsible; and
• the key insights, actions and risks relevant to the firm’s activities.

Where a firm has a more limited role in the manufacture or distribution of products and services to retail customers, its board reporting may be correspondingly streamlined. The assessment should focus on the impact of the firm’s own role and activities on consumer outcomes. Firms do not need to report on Duty obligations that are not relevant to their role, such as customer communications or customer support where these are provided by other firms in the distribution chain.

However, the FCA continues to expect firms to demonstrate how their governance arrangements support good outcomes for retail customers where the Duty applies. Proportionate Duty-related board reporting should still take place at least annually to support board assurance on ongoing compliance, with clear channels for timely escalation of material issues outside the usual reporting cycle.

Practical Implications: What Firms Should Do Now

In light of these proposals, firms should ensure that they carry out the following:

• Review the Consultation Paper in full to understand the precise scope of the proposed changes and how they relate to the firm’s business model and client base.
• Map the current Consumer Duty compliance arrangements against the proposed territorial exclusion, business exclusions and material influence guidance to identify which business lines may be removed from scope.
• Assess whether the proposals, if implemented as drafted, would allow firms to simplify or reduce existing compliance frameworks, monitoring, and reporting obligations.
• Consider whether to respond to the consultation, particularly if your firm has direct experience of disproportionate burdens arising from the Consumer Duty’s current scope.

While the FCA’s proposals provide some comfort and clarity around the existing rules and guidance, firms will need to carefully consider from a practical perspective how this impacts them. FCA will continue to monitor changes in approach to determine if, in practice, a more targeted application of the Duty results in a deterioration of customer outcomes.  Our Financial Services Regulatory team is available to assist firms in assessing the impact of these proposals on their businesses and planning for implementation of final rules. Please contact us for further information.
 

^[1] Also includes payment services and issue of electronic money and connected activities of firms in a distribution chain involving retail customers and where a firm communicates or approves financial promotions for retail customers.