The capsules are only needed if you are going to do something with them. For instance, if you turn on physics (ie. set simulate physics to true) on the character, the character will become a ragdoll, and those capsules are used to calculate how the character falls down and interacts with itself or the environment.
They are also used for hair and cloth physics. For example, the capsules tell the hair physics system where the hair shouldn’t pass through. I believe you don’t need a physics asset for the hair or clothing if they are separate pieces, since you paint those to tell them how to interact with the capsules on the body. I would think that those capsules would push the hair out in a weird way. I’m not 100% sure about this though since I’ve never made a modular character in Unreal.
Here’s a good example video about cloth physics:
