Thoughts from our in-house expert

Redefining Retail Disclosures:

How the FCA’s CCI Framework Impacts the Investment Landscape

Lewis Davison
Senior Product Manager at Confluence

On 19 December 2024 the UK’s Financial Conduct Authority (FCA) published its greatly anticipated consultation (CP24/30) on a new retail product disclosure framework for ‘Consumer Composite Investments’ (CCIs). This development represents a crucial step in overhauling previously onshored EU disclosure legislation – such as the PRIIPs and UCITS KID/KIID frameworks, with the aim of introducing a more flexible and consumer-focused regime.

While the proposed framework seeks to address longstanding criticisms of the PRIIPS KID – including its complexity and prescriptive nature – it appears to lean toward evolution rather revolution. In this blog, we explore the key elements of the proposal, their reach, impacts and timing, and highlight various considerations for firms who will be caught in scope.

In this blog, we explore the key elements of the proposal, their reach, impacts and timing, and highlight various considerations for firms who will be caught in scope.

A note to readers – the below review is considered on an ‘as proposed’ basis. Naturally, proposals may be subject to change between now and the release of final rules, and further ‘sub’ consultations on specific topics (such as transaction costs) are expected in early 2025.

In a hurry? See the key facts below:

Scope

The framework applies to a wide range of investment products, including:

  • Open-ended funds (e.g. PRIIPs, UCITS, NURS, non-PRIIP packaged funds (excluding pensions)
  • Closed-ended funds (e.g. Investment Companies, VCTs)
  • Insurance-based Investment Products (IBIPs)
  • Structured Products
  • Contracts for Difference (CFDs)
  • Derivatives & other complex investments
  • Both product manufacturers and distributors are also within scope

Timing

  • Consultation: 19 Dec 2024 – 20 March 2025, with additional ‘sub’ consultations in early 2025 (transaction costs and transitional provisions)
  • Final rules: Policy Statement (PS) to be published at some point in 2025. CCI will enter into force at this point
  • Implementation: 12-month transition period for closed-ended funds. 18 months for all other product types. Firms can however begin to apply the CCI rules as soon as it enters into force when the PS is published

Requirements

The new framework introduces several changes:

  • Replaces the PRIIPs KID / UCITS KIID with a standalone, simplified product summary, plus an accompanying machine-readable file containing the core information per the product summary.
  • The product summary is not subject to a fixed, regulator-defined template, enabling flexibility in disclosures. It is, however, subject to standardisation of the information to be contained within it.
  • Manufacturers can satisfy the requirements by publishing these on their website and providing to their distributors
  • The product summary must contain basic information (identifiers, strategy, date of revision, complaints/redress and similar), along with risk, past performance and costs & charges information
  • Risk – Replaces the 1-7 scale under PRIIPs/UCITS with a 1-10 scale, based on the standard deviation of returns over a 5 year history
  • Costs & Charges – broadly consistent with PRIIPs – requires one-off entry/exit costs, ongoing costs, transaction costs and contingent costs (oerformance/carried interest) to be disclosed. The FCA will however consult further on the transaction cost methodology in early 2025.
    Eliminates the ‘reduction in yield’ presentation in PRIIPs, in favour of a simple trailing 12-month cost impact.
  • Performance – eliminates forward-looking performance scenarios as under PRIIPs, in favour of a simple past performance across a 10 year history (or up to, if 10 years is not available)

Key challenges and considerations

The new framework introduces several changes:

  • Flexibility on format and layout is good, however it poses a risk to comparability where investors are faced with multiple formats.
  • Firms might consider not only the format of presentation, but the ordering of information within this e.g., leveraging insights from behavioural economics.
  • How will the dynamics between manufacturers and distributors play out? Will distributors seek to modify product summaries widely, and if so, how? Will they require additional information?
  • Firms with UK and EU fund ranges will need to maintain and monitor divergent methodologies across calculation components (risk, performance, costs)
  • CCI is technology-neutral – will firms seek to move beyond PDFs to a more digital interactive/layered presentation?
  • The transition period for closed-ended funds is only 12 months (vs. 18 months for all other product types). Expect this to be challenging if it is not amended in the final rules.

Our next steps

Confluence will be adapting our existing end-to-end PRIIPs KID and UCITS KIID production solution to support impacted firms.

Why are the FCA consulting?

The FCA is not shy in pointing out the key shortcomings of the existing assimilated EU legislation – disclosures are ‘tick-box’ driven, too prescriptive, and are overly complex and confusing for retail investors. These characteristics ultimately hamper investor participation in the market and undermine a healthy investment culture.

The FCA’s vision here is to create a more flexible, proportionate and engaging regime focused on consumer-outcomes. This is about getting the right information to end-investors at the right time in the investment ‘journey’, to deliver good outcomes. It is also a framework intended to enable both firms and investors to use their judgement more.

What is a CCI and who is in-scope?

  • The FCA defines a CCI as ‘an investment where the returns are dependent on the performance of, or changes in, the value of indirect investments.’ In practice, this captures a range of product types – the below is a non-exhaustive list of these:
    • Open-ended funds: PRIIPs, UCITS, NURS and non-PRIIP packaged funds (excluding pensions). This includes overseas funds captured by the UK’s Overseas Funds Regime (OFR).
    • Closed-ended funds: e.g., Investment Companies and Venture Capital Trusts (VCTs) – these are not currently subject to similar retail disclosures following regulatory forbearance.
    • Insurance-based Investment Products (IBIPs)
    • Structured Products
    • Contracts for Difference (CFDs)
    • Derivatives & other complex investments

The CCI framework will apply to both manufacturers and distributors of in-scope products – notably, CCI places greater emphasis on the role of distributors, which we discuss further below.

What is the timeline?

The consultation proposals indicate the following:

  • Consultation-phase: the core CCI consultation will run (from 19 December 2024) to 20 March 2025. The FCA indicates that additional topics will be consulted on in early 2025 – this includes the transaction cost methodology and the transitional provisions. Consumer testing will continue to be conducted during this consultation period
  • Final rules: The FCA indicates that final rules will be delivered via a Policy Statement (PS) in 2025 and will enter into force simultaneously. The FCA is not specific as to when in 2025, however.
  • Implementation and transitional provisions: The FCA is proposing an 18-month transition period for all product types except for closed-ended investment companies, for which it is proposing a 12-month transition period. This is rationalised on the basis that they may not be currently using the PRIIPs KID However, this appears questionable, since all in-scope firms will have to go through extensive implementation projects, and one could argue that those already producing PRIIPs KIDs/UCITS KIIDs may in fact have relatively less work here to adapt existing approaches. In any case, the FCA is clear that all firms can begin applying the CCI rules as soon as the Policy Statement is published and enters into force if they wish.

What’s new and what are the key requirements?

We mention above that this framework proposal is more ‘evolutionary’. That is, manufacturers will still need to produce a summary disclosure document, and many of the key components are not too dissimilar from the existing PRIIPS KID and UCITS KIID requirements that in-scope firms will be very familiar with.

However, there are numerous changes that firms will need to act upon, focused on the ‘Product Summary’ Disclosure:

Gone are the PRIIPs KID and UCITS KIID. In their place, the FCA is proposing that manufacturers produce two key outputs and publish online/provide to their distributors.

  1. A ‘product summary’, which is the PRIIPs/UCITS-replacement disclosure
  2. A machine-readable file, capturing the core information consistent with the product summary.

Firstly, a word on the dynamics here. While the manufacturer must produce the initial product summary, the FCA places greater emphasis on the role of distributors, such that they may choose to modify the manufacturer-produced summary to further tailor this to end-investors and supplement it where required. This is the rationale for requiring a machine-readable file from manufacturers.

In a departure from PRIIPs/UCITS, the product summary itself will not be defined by a fixed template. Instead, firms will have flexibility in how they present the information, subject to certain elements of standardisation as outlined below. Equally, the CCI framework is technology-neutral, and firms are empowered to leverage a more digital, interactive and layered approach to the presentation of information.

Certainly, flexibility can be a positive thing for both manufacturers and distributors. However, this could equally prove to be a point of confusion for investors – despite some standardisation of disclosure components, reviewing multiple versions and presentations of the same document across fund ranges in an investment decision-making journey could harm the ‘engagement’ of investors the FCA is seeking to instil.

Below, we outline the key components of the product summary, which in turn is to be reflected in the machine-readable file:

  • Basic information
    • Date of production or revision of information
    • Product and manufacturer identifiers
    • What the product is and its aims
    • Complaints and redress information
    • Information on holding or exiting the CCI
    • Additional information (e.g., prospectus) and where to find it
    • Risk Information

CCI will retain a standardised risk measure based on volatility (standard deviation of returns), to be calculated based on a 5-year return history or that of an appropriate benchmark/proxy. The metric presentation will move from a 1-7 scale to a 1-10 scale to avoid the bunching of products in the middle-reaches of the scale.

Manufacturers must consider whether additional risk factors, such as liquidity or credit risk, warrant a modification to the risk score.

Unlike PRIIPs, CCI does not define specific categories of products (i.e., Cat 1-4 under PRIIPs), but does include some proposals to handle certain product-specific scenarios, particularly at the high-risk end (derivatives, structured products, CFDs, VCTs) and low-risk end (capital guaranteed products). For example, high-risk products will be assigned a minimum score of 9. Manufacturers will then need to assess relevant factors such as other risk categories to determine whether the score should be a 9 or 10.

Alongside the risk score, manufacturers must also provide narrative descriptions to balance risk and reward

The consultation does not speak to valuation frequency, so it is assumed that the 5-year history of returns is applicable across different valuation frequencies.

Similarly, the topic of ongoing monitoring of risk category is not discussed, albeit a change in risk category would necessitate an updated product summary under the wider concept of material change. Firms might wish to replicate their existing PRIIPs/UCITS monitoring approaches, but this should be confirmed vis a vis final rules in the forthcoming Policy Statement.

  • Costs & Charges

At a high-level, the proposed CCI approach to cost disclosure is broadly consistent with the outgoing PRIIPs framework. The FCA proposes to retain the core cost categories including:

  • One-off entry/exit costs
  • Ongoing costs
  • Transaction costs
  • Contingent costs (performance fees and carried interest)

These costs should be disclosed as percentage values for each category, along with an aggregated percentage figure (excluding contingent costs). Alongside, manufacturers must provide descriptive information, and can also provide more detailed, disaggregated figures to their distributors should they wish.

Look-through of underlying costs is required, which will primarily impact fund-of-funds. As a specific exemption, index tracking funds investing in underlying investment companies will be exempt from this requirement.

On the topic of investment companies, there has been a mixed response from this segment and its industry representation. On the positive side of things, the FCA is excluding costs incurred in the maintenance and commercial operation of real assets hitting on the avoidance of cost-double counting. Gearing costs will also be treated as a risk factor, and not a cost. However, criticism has been voiced on the bundling of fund-of-funds costs as unhelpful to end-consumers in meaningfully comparing costs for these product types. If it is only indexed funds that benefit from the look-through exemption, then clearly, active strategies will suffer.

On transaction costs specifically, despite wider market criticism the FCA considers the existing PRIIPs approach broadly appropriate. However, the FCA plans to consult further on the transaction cost methodology in early 2025 as it acknowledges it is overly complex and ambiguous in places.

In terms of presentation, the CCI proposal scraps the concept of ‘reduction in yield’ (RIY) based on a specific market outcome scenario in favour of a simple trailing 12-month cost impact.

  • Past Performance

The FCA’s CCI proposal scraps any notion of ‘performance scenarios’, instead reverting to the tried-and-tested approach of presenting past performance – in this case, 10 years of history (or as is available, up to 10 years) and net of all product costs. This simplification is a positive step both for producers and consumers of the disclosures.

Past performance should be presented as a line graph and include benchmark(s) comparisons where applicable to show how the initial investment amount (£10k standard) has changed for each, along with explanation of the benchmark(s) chosen (or lack thereof). Certain products must include a benchmark (recognised schemes, qualified investor schemes and long-term asset funds) irrespective of whether a benchmark appears in the prospectus or not.

Manufacturers must use at least quarterly data points, across full 12-month performance periods.

Four key challenges and considerations

The FCA’s proposals, while promising, present several challenges for firms:

  • Flexibility vs. Comparability
    While the flexibility in product summary formatting allows firms to better cater to their audiences, it may lead to difficulties in comparing products across providers, potentially undermining investor confidence.
  • Manufacturer-Distributor Dynamics
    The increased emphasis on distributor accountability could create friction between manufacturers and distributors over the customization of product disclosures.
  • Cross-Jurisdictional Complexity
    Divergences between UK and EU disclosure frameworks add operational complexity for firms operating in multiple jurisdictions, particularly for those seeking alignment between PRIIPs KID and the new CCI framework.
  • Transition Timelines
    The shorter implementation timeline for closed-ended funds could pose significant compliance challenges, particularly for smaller firms with limited resources.

Our Next Steps

As a leading provider in regulatory document production, Confluence will be adapting our existing end-to-end PRIIPs KID and UCITS KIID production solution to support our clients who will be in-scope for the CCI framework.

We plan to progress our solution development to the extent possible based on this initial consultation proposal and will continue to monitor for developments - particularly focused on the forthcoming final rules - to ensure our solution is ready to support our clients according to the transitional period timings as outlined.

As ever, we stand ready to support you with any questions you may have on this regulatory proposal. Please contact your existing Confluence representative or submit an enquiry to us.

If you would like to discuss how this impacts you, or have any further questions, please reach out to your local team.