FCA’s Consultation Paper on Client Categorisation and Conflicts of Interest

On 8 December 2025 the FCA published a consultation paper (CP25/36) proposing to make certain changes to the conflict of interest rules that apply to most regulated firms, including insurers and insurance intermediaries.¹ The aim of the proposals is to reduce the length and complexity of the rules with a view to making them more understandable, accessible and overall easier to navigate, as part of the FCA’s broader simplification initiative. 

The proposed changes to the rules are not intended to change the obligations with which firms must abide, nor are they intended to initiate changes to the systems and processes that firms already have in place to ensure compliance. 

The FCA’s simplification initiative brought about by the introduction of the Consumer Duty has prompted a shift in the regulator’s approach towards supervision. Where previously the FCA adopted a more prescriptive approach, it now aims to take an outcomes-focussed view. This gives the FCA greater scope to streamline or dispense with certain requirements in its Handbook, particularly those more process-orientated in nature, that are known to be duplicative and cumbersome.

The existing rules

Principle 8 of the FCA’s Principles for Business relates to conflicts of interest and requires a firm to manage such conflicts fairly, both between itself and its customers and between a customer and another client. Further detail is contained in the Senior Management Arrangements, Systems and Controls sourcebook (SYSC) 10, which sets out comprehensively the systems firms must have in place to manage and prevent conflicts of interest arising between stakeholders. 

However, insurers and Lloyd’s of London are excluded from the remit of SYSC 10 on account of the FCA recognising the distinct nature of insurance activity in the UK. The exception to this exclusion is if an insurer is engaging in insurance distribution directly, in which case the rules in SYSC 3 apply. On the other hand, firms undertaking insurance distribution activities, such as insurance intermediaries like brokers and agents, remain subject to SYSC 10 (amended and supplemented by SYSC 1 Annex 1) broadly in the same manner as many other regulated firms.

Rationale for change

In CP25/36 the FCA admitted that “[w]hilst these [conflict of interest] rules are important, we recognise that they are overly complex as currently presented in our Handbook“. The regulator goes on to explain that the complexity is partially due to the layering of various EU requirements introduced by different directives over the years. It also acknowledged that several market participants noted differences in the application of the Rules under separate regimes such as MiFD, AIFMD, IDD and UCITS Directive,² which results in firms having to undertake duplicative compliance processes. This is particularly the case if they work cross-sector, as many in the insurance industry do, a common example being an insurer carrying on insurance and investment activity.

Proposed changes

Integrating Insurers into SYSC 10:

The FCA proposes to delete the rules in SYSC 3 that are applicable only to insurers engaged in insurance distribution and consolidate into SYSC 10 all rules relating to insurance distribution, so that all firms – whether insurers, intermediaries or pure distributors – will follow the same unified set of rules.

Further, the FCA proposes that the annexes in SYSC 1 will no longer be relied upon to vary or extend the scope of SYSC 10’s application in respect of different types of products and/or activity. The regulator contends that this measure will enable easier, more efficient navigation of the rules in its handbook for the “vast majority” of firms, including those involved in insurance. 

Importantly, however, Lloyd’s of London (the Society itself and managing agents) will remain excluded from the remit of SYSC 10. 

The Proportionality Provision

The FCA recognises that, as a consequence of its simplification proposals, some requirements which previously applied to some firms as guidance will now apply to all firms as rules. 

Therefore, as a counter-balance the FCA proposes to introduce a universally applicable “proportionality provision”, which will provide that: (i) the rules will apply in a manner that is proportionate to the nature, scale and complexity of a particular firm’s business model, and (ii) the extent of compliance with the rules will always be judged against what was proportionate in the circumstances. In other words, a firm’s compliance with the rules will always be assessed with consideration to the size and complexity of the business carried on by that firm.

Harmonisation

In addition to the above, the FCA also proposes a range of discrete measures to harmonise the rules across SYSC 10. 

Two such measures are to remove unnecessary distinctions between the rules that currently apply to different types of activity, and to merge duplicative provisions within the rules. For example, at present the rules relating to the duty of firms to “manage conflicts of interest” differ depending on the type of activity in question.³ Therefore, the FCA proposes to merge the majority of activity-specific distinctions under one “managing conflicts” rule that will apply generally to all regulated firms. The FCA also seeks to delete from its Handbook some activity specific distinctions entirely and retain a “small number of distinctions” only if they are deemed necessary to maintain the current scope of the rules. If these measures are implemented then the rules in SYSC 10 will be shortened significantly, which will make the Handbook easier to navigate by reducing the need for firms to cross-reference their obligations for each activity.

Another of the FCA’s proposed harmonisation measures is to standardise the use of terminology in SYSC 10. The FCA acknowledges that in SYSC 10, different words are frequently used to describe the same standard, which makes it difficult for firms to interpret the regulator’s expectations. As such, the FCA seeks to use “one set of common phrasing” across SYSC 10 that will apply to all firms. Some examples of the FCA’s proposals are:

1. “material risk of damage” vs “risk of damage“: SYSC 10 currently requires some firms to record any conflict posing a “risk of damage” whilst other firms must record conflicts entailing a “material risk of damage” which on its face appears to be a higher threshold. To align the terms and to make clear its expectations, the FCA proposes consistently to use “material risk of damage“.
2. “manage” vs “prevent or manage” vs “prevent, manage and monitor” vs “manage and prevent conflicts from damaging the interests of the client“: all the foregoing phrases are used in SYSC 10 in relation to the procedures and measures that firms must have in their conflicts policy to handle conflicts. To clarify expectations and impose a common standard, the FCA proposes to require all conflicts policies to include procedures to “prevent or manage” conflicts.
3. “monetary or non-monetary benefit” vs “monies, goods or services“: SYSC 10 currently states that firms conducting insurance distribution activity must consider whether a firm/person receives an inducement in the form of “monies, goods or services” for the purposes of identifying a conflict. However, in respect of other types of firms, the consideration when ascertaining conflicts is whether the inducement takes the form of “monetary or non-monetary benefits“. For consistency with other parts of the handbook, the FCA proposes to apply “monetary or non-monetary benefit” to all firms in SYSC 10.

Next steps

As part of the consultation process the FCA has invited market participants to submit feedback and provide comments on its proposals. The deadline for doing so is 2 February 2026.

James Leigh, Trainee Solicitor, assisted in the preparation of this briefing.

Footnotes:

1. The consultation also addresses client categorisation, but this part is not relevant to insurers.
2. Acronyms stand for: Markets in Financial Instruments Directive, Alternative Investment Fund Managers Directive, Insurance Distribution Directive, Undertakings for Collective Investment in Transferable Securities.
3. By way of example, firms carrying on insurance distribution activities are subject only to SYSC 10.1.7R whereas, in addition to being subject to the foregoing, UK UCITS Management Companies are also subject to SYSC 10.1.19R and AIFMs are subject to SYSC 10.1.25.