FCA Confirms Leasehold Buildings Insurance Reforms
Posted by The Property Institute on 2nd October 2023 -
The Financial Conduct Authority (FCA) has this morning issued a press release confirming leasehold buildings insurance reforms. Regular readers of The Property Institute monthly newsletters will conclude there are no real surprises here, the proposals being well trailed.
From 31st December 2023, insurance firms will be forced to act in leaseholders’ best interests, treat leaseholders as customers when designing products and will be banned from recommending an insurance policy based on commission or remuneration levels, announced in a statement published this morning.
The FCA’s action follows its review of the multi-occupancy buildings insurance market and its aims to ensure better outcomes for leaseholders in the multi-occupancy building insurance market, and other policy stakeholders in a similar position to leaseholders. The new rules will do this by:
- Increasing transparency for leaseholders. This will make it easier for them to identify and challenge poor practices and incentivise firms to deliver better outcomes.
- Requiring firms to ensure their products are consistent with the needs and interests of leaseholders and other policy stakeholders, are priced in a way that provides fair value and that remuneration practices do not lead to poor outcomes.
Insurers will also be required to ensure that their insurance policies provide fair value to leaseholders and provide important information about their policy and its pricing, including the detail of any commission paid for leaseholders.
Although the FCA is pushing ahead with the rules and guidance broadly as they were in the consultation paper, it has made some amendments to them. These amendments are:
- Clarifying the ‘leaseholder’ definition to set out more clearly that it covers residential leaseholders. This means that the disclosure rules only apply to multioccupancy building insurance policies for residential leaseholders. Firms will not need to provide disclosures intended for commercial leaseholders.
- Including an additional part to the definition of ‘policy stakeholder’ so that it only captures natural persons who are acting outside of their trade or profession. This is to clarify that commercial entities (including commercial leaseholders) will not be considered policy stakeholders.
- Introducing guidance to make clear that the required remuneration disclosure for leaseholders must include all forms of remuneration or financial incentive, including contingent remuneration (payment that depends on a policy being taken out) and other remuneration earned post-contract.
- Making provision in the disclosure rules to allow firms to estimate the premium breakdown at building or dwelling level if they are unable to identify an exact figure.
Sheldon Mills, Executive Director of Consumers and Competition, commented:
“Insurance firms must now act in leaseholders’ best interests and ensure that their policies provide fair value. Our reforms will help to strengthen the insurance market by providing new protections for leaseholders. We will not hesitate to take action if firms breach these rules.”
Following a review into broker remuneration practices, the FCA expects brokers to immediately stop paying commissions to third parties (including property managing agents and freeholders) where they do not have appropriate justification and evidence for doing so in line with FCA rules on fair value.
The FCA will undertake further reviews across various products and will consider the full range of regulatory tools available to it as this work is progressed.
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Andrew Bulmer, Chief Executive of The Property Institute, comments:
“Overall, the aims and rules laid out in the policy statement will pose no problems to firms who comply with the ARMA Consumer Charter & Standards and RICS Service Charge Code, where remuneration is required to be proportionate for the work done. However, it will require a change in processes, if only to demonstrate the work done and prove fair value.
“It also looks likely that the policy information will need to be disseminated to leaseholders. This is another task, and we will seek clarification on whether that means posting documentation out or using more current methods of communication, such as placing the details on a secure portal or sharing via email.
In relation to the final paragraph on the statement referencing intervention from DLUHC and their intention to ban payment or sharing of insurance commissions – For reassurance, DLUHC stood on stage at the IRPM Annual Seminar in May and made it clear that the banning of percentage commissions does not mean the banning of remuneration. A fair fee, be it fixed or perhaps an hourly rate or even a blend of the two, would seem to be their thinking. We have heard nothing since to counter this expectation, but we remain hyper-vigilant to news and updates. We will keep you informed as soon as we hear more, likely in the King’s Speech on 7th November.”
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