Consumer Duty Evolution: What's Changing for Distribution Chains and Wholesale Markets

The Consumer Duty has fundamentally transformed expectations for retail financial services since its implementation in July 2023. However, significant questions remain about how the Duty applies across complex distribution chains and whether wholesale market activities should fall within its scope. The FCA has acknowledged these concerns and signalled that a consultation in the first half of 2026 will address them directly. For firms operating in distribution chains or wholesale markets, this represents a critical opportunity to shape the regulatory framework and prepare for potential changes.

This article examines the current challenges, anticipated consultation themes, and practical steps firms should take to prepare for what may be a significant recalibration of Consumer Duty scope and application.

The Distribution Chain Challenge

Since the Consumer Duty came into force, firms operating within complex distribution chains have grappled with significant practical challenges. The requirement for manufacturers and distributors to work together to ensure good customer outcomes has proven more complex in practice than the regulations may have anticipated.

Current Pain Points

The distribution chain provisions in PRIN 2A.4 require manufacturers to take reasonable steps to ensure their products and services are distributed appropriately, whilst distributors must ensure they do not undermine the manufacturer's intended distribution strategy. In theory, this creates a coherent framework. In practice, several significant challenges have emerged.

Information asymmetry represents perhaps the most fundamental challenge. Manufacturers often lack visibility of how their products perform once they reach end customers through distributors. Equally, distributors may not receive sufficient information from manufacturers about target markets, intended benefits, and value assessments. This gap makes it difficult for either party to fulfil their Consumer Duty obligations with confidence.

Contractual complexity has also emerged as a significant barrier. Many distribution arrangements predate the Consumer Duty, with contracts that do not contemplate the information sharing, ongoing monitoring, and mutual cooperation the Duty requires. Renegotiating these arrangements has proven time-consuming and, in some cases, commercially contentious.

Accountability gaps create particular concern. When a customer experiences poor outcomes, determining which party in the distribution chain bears responsibility can be genuinely difficult. The FCA has emphasised that firms cannot contract out of their Consumer Duty obligations, yet practical accountability remains unclear in many scenarios.

Proportionality concerns have been voiced particularly by firms further removed from the retail customer. Where a manufacturer's product passes through multiple intermediaries before reaching consumers, the manufacturer's ability to influence or monitor outcomes becomes increasingly limited. Many firms question whether the current framework appropriately reflects these practical realities.

Wholesale Markets: The B2B Question

A distinct but related challenge concerns the application of Consumer Duty to wholesale market activities. The Duty was designed to protect retail customers, yet its broad drafting has created uncertainty about whether and how it applies to purely business-to-business transactions.

Industry Concerns

Wholesale market participants have raised legitimate questions about Consumer Duty applicability. When a firm provides services exclusively to professional clients, sophisticated counterparties, or other regulated firms, the protective rationale underpinning the Consumer Duty arguably applies with less force.

Professional counterparty transactions present the clearest case. When two regulated firms transact on equal terms, with equivalent expertise and bargaining power, the consumer protection framework seems misaligned. Yet firms report uncertainty about whether they can rely on counterparty status to exclude Consumer Duty requirements.

Wholesale-only firms face particular challenges. Asset managers serving only institutional clients, wholesale brokers, and interdealer intermediaries may have no direct retail customer relationships, yet find themselves subject to requirements designed with retail customers in mind.

Data services and market infrastructure providers occupy an especially uncertain position. Firms providing data feeds, trading platforms, or settlement services to other financial institutions question how consumer outcome concepts apply to their activities.

The FCA has indicated awareness of these concerns. In recent speeches and publications, senior FCA officials have acknowledged that the Consumer Duty was designed for retail markets and that its application to wholesale activities requires careful consideration.

The H1 2026 Consultation: What to Expect

The FCA has confirmed that a consultation addressing distribution chain and wholesale market issues will be published in the first half of 2026. Whilst the precise scope and content remain to be seen, several themes are likely to feature prominently.

Anticipated Scope Clarifications

Distribution chain responsibilities are likely to be addressed with greater specificity. The consultation may clarify precisely what information must flow between manufacturers and distributors, how reliance arrangements should operate, and how accountability should be allocated when multiple parties contribute to customer outcomes.

Wholesale exemptions represent perhaps the most significant potential change. The FCA may propose exemptions or modified requirements for certain wholesale activities, potentially based on client categorisation, transaction type, or the nature of the service provided. Any such exemptions would need careful drafting to prevent regulatory arbitrage whilst addressing legitimate concerns.

Proportionality guidance may provide more granular direction on how firms should scale their Consumer Duty arrangements based on their position in the distribution chain and the nature of their activities. This could include safe harbours for firms meeting specified criteria.

Potential Exemption Models

Drawing on FCA statements and industry advocacy, several exemption models could feature in the consultation:

Client-based exemptions might disapply or modify Consumer Duty requirements where the end client is a professional client, eligible counterparty, or another regulated firm. This would align Consumer Duty scope more closely with other regulatory frameworks that differentiate by client type.

Activity-based exemptions could create carve-outs for specified wholesale activities, such as interbank lending, institutional asset management, or market-making. This approach would require careful definition of qualifying activities.

Hybrid approaches might combine elements of both, providing exemptions where both the client and the activity meet specified criteria.

The consultation will likely seek industry views on the appropriate scope of any exemptions and the safeguards needed to ensure they are not abused.

Reliance Arrangements: Seeking Clarity

One of the most pressing issues the consultation should address concerns reliance arrangements within distribution chains. The current framework permits firms to rely on other parties in the chain to fulfil certain Consumer Duty requirements, but the practical operation of these arrangements remains unclear.

Current Uncertainties

Scope of permissible reliance requires clarification. Firms remain uncertain about which Consumer Duty obligations can be delegated through reliance arrangements and which must be retained regardless of distribution structure.

Due diligence requirements for reliance arrangements need clearer articulation. When a manufacturer relies on a distributor to communicate product information or assess customer suitability, what steps must the manufacturer take to satisfy itself that the distributor will perform adequately?

Ongoing monitoring obligations associated with reliance arrangements remain ambiguous. Must firms actively monitor the performance of parties they rely upon, and if so, to what standard?

Liability when reliance fails presents significant concern. If a firm relies on another party and that party fails to perform, the FCA has suggested the relying firm retains responsibility. Yet firms seek clarity on how this operates practically and what steps would constitute adequate protective measures.

Expected Guidance

The consultation is likely to address reliance arrangements directly, potentially through:

Clear specification of which obligations may be subject to reliance arrangements
Defined due diligence requirements before entering reliance arrangements
Minimum standards for ongoing oversight of relied-upon parties
Guidance on documentation and evidence retention
Clarity on regulatory expectations when relied-upon parties fail

The Mid-2026 Consumer Duty Review

The distribution chain consultation should be viewed in the context of the FCA's broader planned review of Consumer Duty implementation and effectiveness, scheduled for mid-2026. This review will assess how the Duty has operated across the market and may inform further policy development.

Review Scope

The mid-2026 review is expected to examine:

Whether the Duty is achieving its intended outcomes of reducing consumer harm
How firms have embedded Consumer Duty requirements in practice
Areas where the regulatory framework may require adjustment
Enforcement approach and supervisory findings
International comparisons and best practice

Implications for Distribution Chain Issues

The timing of the distribution chain consultation ahead of the broader review suggests the FCA recognises these issues require earlier attention. However, findings from the consultation may feed into the mid-2026 review, potentially leading to further refinements later in the year.

Firms should therefore approach consultation responses strategically, recognising that well-articulated concerns about distribution chains could influence both the immediate consultation outcomes and the longer-term regulatory direction.

Strategic Preparation: What Firms Should Do Now

Whilst awaiting the consultation, firms operating in distribution chains or wholesale markets should take proactive steps to prepare.

Assess Your Current Position

Conduct a thorough assessment of your firm's position:

Map your distribution chains and identify all parties between your firm and end customers
Document current arrangements for information sharing, monitoring, and accountability
Identify gaps between current practice and likely regulatory expectations
Assess which of your activities might qualify for potential wholesale exemptions
Review contracts with distribution partners for Consumer Duty adequacy

Engage with Industry Bodies

Trade associations and industry bodies will play a crucial role in shaping consultation responses:

Ensure your firm's concerns are captured in industry submissions
Participate in working groups examining distribution chain issues
Share practical examples that illustrate current challenges
Collaborate on developing proposed solutions that could inform regulatory thinking

Document Evidence of Challenges

The most persuasive consultation responses will be evidence-based:

Collect concrete examples of where current requirements create practical difficulties
Quantify costs associated with current distribution chain compliance
Document instances where requirements produce perverse outcomes
Identify cases where current framework creates uncertainty affecting business decisions

Prepare for Multiple Scenarios

Given uncertainty about consultation outcomes, prepare for various possibilities:

Full retention of current requirements with additional guidance only
Partial exemptions for specified wholesale activities
Comprehensive revision of distribution chain provisions
Modified reliance arrangement framework

For each scenario, consider the implications for your firm and prepare implementation plans that can be activated once the consultation outcome becomes clear.

Review Existing Arrangements

Use this period to optimise current arrangements:

Ensure contracts with distribution partners contain adequate Consumer Duty provisions
Establish or improve information sharing mechanisms
Develop monitoring frameworks that could demonstrate compliance under various regulatory approaches
Train relevant staff on current obligations and prepare them for potential changes

How MEMA Can Help

The Consumer Duty's application to distribution chains and wholesale markets represents one of the most complex regulatory challenges facing UK financial services firms. MEMA Consultants has extensive experience helping firms navigate these issues and prepare for regulatory change.

Our services include:

Distribution chain mapping and gap analysis to identify where your current arrangements may fall short of regulatory expectations
Consultation response support to ensure your firm's concerns are effectively articulated to the FCA
Contract review and negotiation to strengthen Consumer Duty provisions in distribution agreements
Wholesale activity assessment to evaluate whether your business could benefit from potential exemptions
Reliance arrangement frameworks to structure relationships with distribution partners appropriately
Implementation planning to prepare your firm for multiple consultation outcomes
Board and senior management briefings to ensure leadership understands the implications of potential changes

Our team includes former FCA supervisors with direct experience of distribution chain supervision and seasoned consultants who have helped firms across the wholesale and retail spectrum address Consumer Duty requirements.

Contact us today to discuss how we can help your firm prepare for the upcoming consultation and whatever changes it may bring.

About the Author

The MEMA Regulatory Team comprises former FCA supervisors and experienced compliance consultants with extensive expertise in Consumer Duty implementation across complex distribution chains and wholesale market activities.

This article is for general guidance only and does not constitute legal or regulatory advice. Firms should seek independent professional advice tailored to their specific circumstances.