As you are no doubt aware, the Financial Conduct Authority (FCA) has recently published changes to rules relating to insurance for multi-occupancy premises. This follows reports published in September 2022 and April 2023 which raised concerns about this sector of the insurance market and highlighted the risk of poor outcomes for leaseholders. Furthermore the Department for Levelling Up, Housing and Communities (DLUHC) has indicated that they intend to take further action including banning of commission for certain parties. The aim of this paper is to look at the key changes and what they mean for our partners involved in arranging and maintaining policies for leasehold properties.

We’re here to guide you through the intricacies, ensuring clients benefit from disclosure and fair value. Stay ahead, stay informed.

Who is affected?

There are a number of models for freeholders & property managers. These include:

• Directly authorised by the FCA
• Appointed Representatives
• Exempt Professional Firms (such as RICS Insurance Authorised)
• Introducers and Introducer Appointed Representatives (IARs)
• Freeholders, arranging insurance and charging their leaseholders
• Residents’ Management Companies (RMC) or Right to Manage (RTM) arrangements
• Other unauthorised firms arranging policies or collecting premiums

The changes mainly impact the following activities:

• Provision or passing on insurance quotations & documentation
• Making or passing on decisions to proceed
• Company Secretary responsibilities
• Any remuneration received such as commission

When do these new rules come into effect?

The new rules apply to policies renewing or incepting on or after 31st December 2023. Notably, this is one of the shortest implementation periods set by the FCA who considered it important to have the new rules in force for the beginning of 2024, when many multi-occupancy buildings insurance contracts will be renewed.

Why are the FCA making these changes?

Residential leaseholders ultimately pay for, and have an interest in, the subject matter of the insurance policy. Under previous rules, they had limited rights to information about the policy they are funding. At the same time, concerns have been raised about commission sharing and whether such payments are proportionate to any work being done. The new rules are designed to give leaseholders rights similar to policyholders and to receive information about the cover being arranged and for which they have to pay. The intent here is not to seek collective decision making, but to ensure transparency and empower leaseholders to protect their interest through existing channels.

So what are the new rules?

The FCA has announced a number of reforms. Some of these will sit in the background, such as insurers needing to develop new documents. Others impact those arranging insurance, whether as a policyholder, Managing Agent or Insurance Broker. These fall into two main categories: Disclosure and Fair Value.

Transparency is the key to trust. We believe in clarity, promptness, and a commitment to the best interests of both freeholders and leaseholders.

Disclosure

Firms will be required to disclose key information about the product and their services in the new disclosure documents which will include information on:

• A summary of the features of the policy, including the main benefits, coverage and exclusions of the policy, its duration and the insured sum
• Clear pricing information including the premium and relevant tax
• The total remuneration received for arranging the insurance, including commission paid by insurers. Remuneration paid to other parties including unregulated Property
• Managing Agents (PMA’s) and freeholders will need to be included
• Any ownership links between the intermediary and any insurers and about the insurers with whom the insurance is placed
• The number of alternative quotes that have been obtained with further details to be provided upon request
• A brief explanation as to why the proposed policy is right for both the freeholder and leaseholders

Disclosure is proactive and the above information must be provided promptly after the conclusion of the contract. It must also be provided in a way that is clear and easy to understand. This information is to be provided to the contractual customer of the insurer or intermediary with clear instructions, it is to be passed on to leaseholders. Firms are required to provide this information directly to leaseholders upon request.

Fair Value and customers best interests

Leaseholders are usually not involved in setting up the insurance policy, or they gain rights under the insurance contract such as by bringing claims. They also may not have a direct client relationship with an insurer or broker. By reason of this, they have not had the same rights as ‘customers’ or ‘policyholders’. Under the new rules regulated firms will be required to:

• Act honestly, fairly and professionally in accordance with the best interests of the leaseholders and freeholders equally
• Consider leaseholders as a relevant part of the target market when designing, pricing and distributing their products
• Demonstrate that products provide fair value to leaseholders. This means that there must be a fair relationship between the total price and the overall benefits the leaseholder receives.

Firms will need to consider the amount of all forms of remuneration, including financial incentives, they share with other parties in the distribution chain, such as freeholders and PMA’s. Such payments will not be allowed where firms cannot demonstrate they represent fair value to leaseholders. As a result of these rules, intermediaries who receive percentage-based commissions will need to assess the commission received by all parties against the work undertaken by each, and evaluate whether the outcome reflects fair value, both for policyholders and leaseholders.

Conclusion

The FCA’s reform on multi-occupancy buildings insurance have introduced a new era of transparency and accountability. Whilst insurance brokers, freeholders and property managing agents may face increased administrative burdens, these reforms ultimately benefit leaseholders by ensuring fair pricing, increased transparency and improve consumer confidence. Firms that adapt to these changes and prioritise the best interest of leaseholders are likely to thrive in this reformed regulatory landscape. The changes to the definition of a ‘customer’ under these new rules applies to insurance being sold in all parts of the UK.

Would you like to find out more? Or perhaps you’d like to speak to one of our expert advisors? Get in touch with us 0333 222 1030.