A new UK retail disclosure framework is coming

The UK Government published a draft statutory instrument (“SI”) on 22 November 2023 (and accompanying policy note) granting the FCA the powers to construct and deliver a new UK retail disclosure framework for Consumer Composite Investments (“CCIs”), which will replace the UK PRIIPs regime, and is intended to be “proportionate and tailored” for the UK market.

In summary, this SI would:

• replace the concept of a PRIIP and define products in scope of the UK framework as “consumer composite investments”;
• regulate manufacturing, advising and offering a CCI to a UK retail investor via the designated activities regime and provide the FCA with rule-making powers;
• restate FCA supervisory and enforcement powers on product intervention and suspension;
• set civil liability for pre-contractual disclosures, and
• retain the transition period for UCITS KIIDs.

Overall, the instrument scope of the regime appears to be very similar to the existing UK PRIIPs rules. However, the draft SI could result in a much broader population of firms captured as “manufacturers” of CCIs (in particular, because the draft SI partly borrows from the UK consumer duty definition of “manufacturer”). Importantly, the SI does not however prescribe the actual disclosure requirements, which the FCA will consult on in due course. 

A transition period is also being maintained for UK UCITS / NURS funds and EU UCITS funds that have been recognised in the UK. 

The accompanying policy note also suggests that the Treasury or the FCA will be making changes to the costs disclosure obligations in Articles 50 and 51 of the onshored MiFID II Org Regulation to accompany this package – which should help avoid duplication of retail costs disclosures. 

Let’s get into some of the details:

What is a CCI?

The draft SI defines a CCI as: 

(a) an investment, or 

(b) an insurance product, 

other than excluded products, where the amount repayable 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 retail investor.

This looks markedly similar to the definition of a PRIIP, as defined in Article 4 of the UK PRIIPs Regulation. Likewise, the list of excluded products in Article 3 tracks neatly across to the list of products set out in Article 2 of the UK PRIIPs Regulation, to which that regulation does not apply. The draft SI has unfortunately not seized the opportunity to clarify open questions that have long existed regarding the PRIIPs framework as to which products are and are not in-scope. The policy note does however welcome views on the legislative exclusions to the regime and notes that the FCA’s rules will provide further details on excluded products in due course.

The similarities here should not be surprising. The UK Government’s gripe with the PRIIPs framework lies not with its policy objective of ensuring retail investors receive appropriate disclosure to make informed investment decisions with respect to PRIIPs per se, but rather with what it perceives to be the “highly prescriptive and overly burdensome” requirements of the EU’s PRIIPs disclosure framework (which was onshored in the UK post-Brexit), which prized comparability of the Key Information Document (“KID”) of, often very different, products, rather than clear and useful information for retail investors. It seems fair to conclude that the UK Government’s snazzy rebranding of PRIIPs to CCIs is intended to distance the new regime from the onerous reputation of the old. However, on the other hand, this just seems to introduce more complex jargon in the UK regarding the promotion of retail products - noting that there are already a number of complex labels in the UK that apply to retail products, such as non-mass market investments (NMMIs) and restricted mass market investments (RMMIs).

Accordingly, the draft SI is the UK’s first substantive stride towards repealing the PRIIPs Regulation and charting a different course.

How will CCI disclosure be regulated?

In a similar vein to the PRIIPs regime, the draft SI purports to grant the FCA “rule-making powers” to require firms to provide disclosure to UK retail investors in relation to certain designated activities the firm carries out, namely manufacturing, advising on, or offering a CCI to a retail investor located in the UK. Importantly, the new UK disclosure requirements will apply to all funds marketing to UK retail investors, including UK authorised funds and recognised overseas funds.

HM Treasury further explained in its policy note that the FCA will be granted “certain supervisory and enforcement powers” in relation to the above designated activities. The aim here is to enable the FCA to “maintain the application and enforcement of the current regulatory perimeter and create tailored UK rules for retail disclosure without requiring all firms in scope of the activity to seek full FCA authorisation under the [RAO]”.

The draft SI also states that firms may be subject to civil liability for providing misleading or inaccurate disclosure or failing to meet the requirements that will be set out in the FCA’s rules where a retail investor is able to demonstrate loss.

In this context, HM Treasury have also requested views on whether the SI should provide greater clarification on when a product is considered to be made available to UK retail investors, or if this should be set out in the FCA’s detailed rules.

Who will be subject to the regime? 

Similar to the existing PRIIPs regime, the rules apply to manufacturers of CCIs and firms advising on or offering CCIs (regardless of whether they are FCA regulated or not). 

However, the draft SI includes a definition of “manufacturer” which has been partly borrowed from the UK Consumer Duty rules and is much broader than the market interpretation of “manufacturing” in the PRIIPs context – as it would include firms that are “creating, developing, designing, issuing, managing, operating, carrying out, or underwriting” a CCI. It also includes firms that are “making changes to a term, condition, or feature of a consumer composite investment” which again seems very broad (we note that the current PRIIPs regime also captures as manufacturers, firms that make changes to an existing PRIIP – however that has generally been interpreted as capturing material changes only).   

The draft SI also defines the activity of “offering a consumer composite investment” which appears to be a bit circular as it applies not only to firms selling a CCI but also firms that are otherwise communicating sufficient information on the CCI and its terms. 

Transition period for UK/EU UCITS funds and UK NURS

HM Treasury proposes to retain the transition period (which expires on 31 December 2026) for:

• UK UCITS funds or UK non-UCITS retail schemes (NURS) – these funds can continue providing UK UCITS KIIDs or COLL 4.7 compliant information respectively, during the transition period;
• EEA UCITS funds that are recognised under the UK’s Brexit temporary marketing permissions regime (TMPR), upcoming overseas funds regime (OFR) or s272 recognition regime – these funds can continue providing EU PRIIPs KIDs, during the transition period.

It is, however, open to such funds to choose to transition to the new CCI disclosure requirements from the date that the FCA’s new rules come into effect. The transition period however does not seem to apply to EU UCITS funds that are not UK recognised (under the TMPR, OFR or s272). 

All funds (including overseas recognised funds) must follow the new UK retail disclosure framework for CCIs from 1 January 2027.

Next steps

HM Treasury intends to legislate during 2024, subject to Parliamentary time permitting.

In terms of what the actual disclosure requirements will look like, all we know at this stage is that the FCA will consult on their draft rules for CCI disclosures “in due course”.