FCA publishes package of investment regulation reforms

The FCA has published its long-awaited decisions and further proposals on reforms to how it regulates the conduct of investment business. The package comprises:

• consultation on client categorisation and conflicts of interest: These proposals look to simplify the conflicts of interest rules to rationalise what is currently in SYSC 3 and SYSC 10 and reduce their complexity and remove any unnecessary distinctions between various types of firm, and to reset how firms distinguish between retail and professional clients, as well as clarifying and simplifying other aspects of client categorisation. The proposals on categorisation aim to ensure that people who have the right expertise or “substantial wealth” can access appropriate products but stop firms being able to influence unqualified investors to opt out of retail protections. The proposals suggest:
  • removing the current quantitative test and enhancing the required qualitative assessment; introducing a new “alternative wealth” assessment; and improving safeguards around opt outs.
  • instead, allowing firms to treat clients as elective professionals if
    • the client either has net investable assets of more than £10m or the firm has concluded, based on a qualitative assessment, that the client is capable of making their own investment decisions and understanding the risks of the products and services the firm may offer; and
    • the client has asked to be categorised as a professional and has signed to give its informed consent; and
    • the categorisation is compatible with the firm’s obligations to act honestly, fairly and professionally and in the best interests of the client, and under the Consumer Duty;
• a discussion paper on expanding consumer access to investments: in this paper the FCA asks how regulations can help to ensure consumers take informed risks. The paper looks at how to encourage consumers to the markets and allow firms to continue to innovate while also protecting consumers against risk from scams. The paper leans on the new CCI framework discussed below, and on the work on the Advice Guidance boundary, and says the FCA wants to work to further simplify disclosure as part of its post-Consumer Duty streamlining of rules. The FCA asks how its conduct, financial promotion and distribution rules are working, and whether changes would be beneficial. The paper seeks views on specific areas of risk or opportunity such as:
  • use of “digital engagement practices”, which have attracted increasing consumer use and where some trading apps in particular can blur the distinction between investment and gambling;
  • fractionalisation of investments;
  • use of model portfolio services;
  • speculative products; and
  • P2P lending, where the market has contracted of late.
• the final rules on Consumer Composite Investments, which replace the assimilated EU PRIIPs and UCITS disclosure requirements: these rules follow changes in legislation, which take effect on 6 April 2026, with the regime coming fully into force on 8 June 2027. The changes are in several of the Handbook modules, not lease COBS, PROD, COLL and FUND; and
• an update of its expectations on how manufacturers and distributors should work together to meet Consumer Duty expectations. In the first half of next year the FCA will be considering and reviewing its rules on firms working together to deliver products or services. For the moment, it is not making any changes to existing guidance, but clarifying its expectations, which are:
  • that firms have correctly identified who is involved in relevant product manufacture;
  • that where more than one firm is involved, there is a written agreement setting out respective responsibilities;
  • firms working together are not required to have a say in each other’s decisions or make decisions jointly;
  • firms do not need to allocate responsibilities between themselves evenly; and
  • firms will generally only be liable for harm they have caused – except in cases of outsourcing: part of FCA’s work next year will look at clarifying how these boundaries work when all firms involved are authorised.

Consultation on the conflicts and client categorisation proposals closes on 2 February, and on the discussion paper on 6 March.