You may have already heard about The Financial Conduct Authority’s (FCA) recently-published final rules for multi-occupancy building insurance, which came into effect on 31 December 2023.
Covering all multi-occupancy residential or mixed-use properties, irrespective of building height, the key takeaway if that all leaseholders will be treated as ‘customers’. In addition, there will be an imperative to determine ‘fair value’ if and when commissions are to be shared with landlords, managing agents, and freeholders.
If you’re a landlord or letting agent, there’s quite a lot of info to take on, so we’ve simplified and highlighted the most important parts.
Do I need to know about this?
The answer is “yes” if you fall into one of the following groups:
- Regulated insurers and intermediaries
- Industry groups and trade bodies
- Unregulated firms involved with multi-occupancy buildings, such as property managing agents)
- Freeholder owners who are landlords of multi-occupancy buildings
- Leaseholder representative groups and individual leaseholders
In addition, during the leasehold reform phase, the FCA categorises landlords, managing agents, and freeholders as ‘third parties,’ – a term you’ll see a lot in this article.
Some useful background and context:
In April 2023, the FCA proposed rule changes identifying issues in the multi-occupancy building insurance market: These issues were:
- Leaseholders to bear insurance costs without influence on policy selection or pricing and would therefore not be seen as ‘customers’ by insurers or brokers. In short, if not considered customers, there’s no explicit obligation to prioritise their interests.
- Lack of transparency has impeded leaseholders from challenging the reasonableness of costs and enables firms to conceal unsound practices
- Certain remuneration practices have historically appeared to be excessive, failing to provide fair value. The distribution of insurance often involves multiple parties receiving remuneration included in the premium. The FCA found instances where brokers received commissions of up to 62 percent, with most firms unable to justify these practices. A major concern being the sharing of commissions with freeholders and their property managing agents (PMAs).
- This package of issues has significantly distressed many leaseholders, impacting their mental health and overall well-being
To address these issues, The FCA suggested implementing new disclosure standards to offer crucial information to leaseholders. They also called for an expansion of the definition of ‘customers’ to encompass leaseholders and similar parties within the scope of specific regulations, as we mentioned in our introduction.
And then there were FCA new requirements:
This brings us onto the agreed and final ‘new rules’ from the FCA for multi-occupancy building insurance, introducing new measures, designed to deliver better outcomes for leaseholders.
These address the lack of focus on (and support for) leaseholders – both in terms of product value and transparency.
So, what’s been agreed by the FCA?
The Product Intervention and Product Governance Sourcebook (PROD) requires firms to have a change of attitude, treating leaseholders as the critical part of the target market they are, when designing, pricing, and distributing their products.
In addition, there must be an authentic demonstration that products provide decent value to leaseholders as well as any other clients. Therefore, it’s imperative that there’s a fair relationship between the total price and the overall benefits leaseholders receive.
Firms also need to give due diligence to the amount of remuneration they share with third parties. These new and bold FCA rules disallow such payments unless firms can demonstrate they provide fair value to leaseholders.
There are also the Insurance Conduct of Business Sourcebook (ICOBS) rules which require firms to apply the customer’s best interests for the benefit of policy stakeholders. Put simply, businesses need to act honestly, fairly, and professionally in the best interests of leaseholders.
The FCA accepts third parties and leaseholders may not always be in total alignment, but that doesn’t mean either party should be any less dedicated to ensuring their properties have the right insurance cover at a reasonable price. Firms are already required to act in the best interests of customers and to manage differences in approach, but the new rules set it in stone.
Another part of the overarching FCA requirements are the Senior Management Arrangements, Systems and Controls (SYSC) rules. This is the bit that requires firms to treat leaseholders and other policy stakeholders as customers – a real ‘about face’ from previous iterations.
Breaking this down further, when it comes to remuneration, business must be clear whether they intend to retain the whole amount or make payments to third parties. And in a further rule regarding customer treatment, any payment to another person must be in the best interests of customers (including policy stakeholders).
Who else is involved by definition:
Policy stakeholder
The FCA defines a stakeholder as “A natural person (excluding a policyholder) who is under a contractual or statutory obligation, which does not arise solely from that person’s trade or profession, to pay an amount relating to a) the premium, and b) any other costs connected to the distribution of a non-investment insurance contract. Also, where the obligation arises in relation to the person having an interest and/or benefit in the subject matter of the insurance.”
Commercial tenants
Under the FCA’s new rules, these are not defined as leaseholders or policy stakeholders. So, there is no change for leaseholders or third parties in connection with commercial properties.
Sub-tenants
The FCA does not consider sub-tenants or those with assured shorthold tenancies to be leaseholders or policy stakeholders. This is because tenants in these cases do not typically have a specific contractual obligation to pay an amount relating to the insurance premium for building cover. Their obligation to make any payment is not sufficiently connected to the insurance premium to be covered by the definition.
How does the FCA define ‘fair value’?
We mentioned ‘fair value’ at the start, so let’s take a closer look at that. One of the four expected outcomes under the FCA’s new Consumer Duty is that products and services should be sold at a price that reflects their value, and there should be no excessively high fees. Under the FCA’s new rules for multi-occupancy building insurance, firms must demonstrate that products provide: “fair value to leaseholders as well as any other customers.” This means there must be equity between the total price and the overall benefits leaseholders receive.
New disclosure rules:
Leaseholders should be able to access information on the following:
- A summary of the features of the policy, including main benefits, coverage and exclusions of the policy, duration and insured sum
- The policy premium. Where the policy covers a portfolio of buildings, firms must disclose the premium at building and dwelling level
- The remuneration which any authorised intermediaries received for arranging the insurance, as well as remuneration they pay to third parties
- Information about potential conflicts of interests, such as ownership links between the intermediary and the insurer, and about the insurers who may be arranging the policy
- The number of alternative quotes they have obtained (with further details of these to be provided on request) and a brief explanation of why they have proposed or recommended that the policy is in the interests of both the freeholder and leaseholders
Who is responsible for providing information to leaseholders?
The onus should be split between the insurer and intermediary (for example, Protect My Let, a Howden Company). The insurer is responsible for providing the policy summary and pricing guidance, while the intermediary manages remuneration, conflicts of interest, and placement insight. The third party who’s in contact with the customer is responsible for providing the information to them.
What this means in practice is, Protect My Let shoulders the responsibility for obtaining the appropriate policy summaries from the insurer and producing the disclosure statements, covering all the required information for all leaseholders. This is required to be issued as soon as reasonably practicable after the conclusion of the contract. It will be issued to you (our client) to then make available to each leaseholder.
