New UK Retail Disclosure Framework for Consumer Composite Investments

Following its July response to its consultation, HM Treasury has published a draft of the statutory instrument that will implement the U.K.'s revised retail disclosure framework. The draft Consumer Composite Investments (Designated Activities) Regulations 2024 will replace the existing onshored Packaged Retail and Insurance-Based Investment Products Regulation which contains rules on disclosures for complex retail investment and insurance products. The PRIIPs Regulation is often cited as an example sine qua non of poorly conceived, poorly drafted, ill-thought through EU legislation with unintended consequences. In particular, it is aimed at packaged retail products, such as FTSE-trackers and insurance-wrapped investments, but was drafted so as to impose onerous and unnecessary disclosure rules on bonds and other standardized securities, effectively foreclosing retail activity in a broad range of "vanilla" investments in the EU (and, when it was in the EU, the U.K.), as well as largely frustrating the EU's "capital markets union" project. These issues are discussed in our client note, "PRIIPS and Capital Markets Transactions: A Better Way Forward?". Replacing the PRIIPs Regulation was therefore identified as a post-Brexit U.K. priority under HM Treasury's Smarter Regulatory Framework. The new rules will allow for a revised U.K. retail disclosure regime that is applicable only to more complex products, suitable to the U.K.'s capital markets and encourages informed retail investor participation in those markets.

The new framework is based on a definition of “consumer composite investments,” which quite closely follows the definition of Packaged Retail Investment Product in the PRIIPs Regulation, as does the list of excluded products.

The amended retail disclosure regime will be part of the U.K.’s new Designated Activities Regime, established under the Financial Services and Markets Act 2023. Any person, regardless of whether they are U.K.-regulated, conducting the designated activities will fall under the Financial Conduct Authority’s remit. The draft Consumer Composite Investments (Designated Activities) Regulations 2024 stipulates the following as designated activities:

1. Manufacturing a CCI made available to a U.K. retail investor.
2. Advising on a CCI if the advice is: (a) given to a person located in the U.K., and (b) given to the person in their capacity as a retail investor or potential retail investor or in their capacity as agent for a retail investor.
3. Offering a CCI to a U.K. retail investor.

The meaning of “made available” will be set out in the FCA’s rules. The FCA published new guidance to clarify the meaning of “made available” using powers under the Financial Services Act 2021, along with rules on the features of corporate bonds that make a product a PRIIP. We discussed those changes in our client note, “UK PRIIPs Review Brings Welcome Clarification.”

The draft Consumer Composite Investments (Designated Activities) Regulations 2024 grant the FCA powers to make designated activity rules related to these activities, to suspend such rules and to dispense with the rules. The FCA is also given a power of direction, which will allow it to exercise the existing product intervention and suspension powers. The SI that establishes the DAR (expected in early 2024) will contain the remainder of the FCA’s supervisory and enforcement powers, which will apply across all designated activities.

According to HM Treasury’s policy note accompanying the draft SI, firms will be subject to civil liability for a retail investor’s loss where the firm fails to comply with the FCA’s designated activity rules or if the firm provides a retail investor with inaccurate or misleading information about a consumer composite investment. That liability may be curtailed by the FCA for specified rules.

Finally, the draft SI provides a transitional regime until December 31, 2026, for UCITS and non-UCITS funds. Provisions, yet to be included in the draft SI, will set out transitional arrangements for enforcement matters under the PRIIPs Regulation.

Technical comments on the draft Consumer Composite Investments (Designated Activities) Regulations 2024 may be submitted until January 10, 2024. The FCA is expected to consult in H1 on its proposed rules for the revised retail disclosure framework. The draft Consumer Composite Investments (Designated Activities) Regulations 2024 will enter into force on the same date that the FCA rules apply, and those will coincide with repeal of the PRIIPs Regulation.

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