Multi-Occupancy Buildings Insurance – ​New Regulations

As you will be aware, new FCA Regulations in respect of Multi-Occupancy Building Insurance took effect from the 31st December 2023.

The regulations affect residential leaseholders and is not intended for commercial leaseholders.

The purpose of this communication is to provide you with a summary of the changes and to explain how Commercial Express are responding to the new regulations.

Background

Back in September 2022, the FCA published a report following concerns that leaseholders were experiencing poor outcomes and increased costs in respect of Multi-Occupancy Buildings Insurance.  The costs of arranging insurance for buildings of multi-occupancy are usually passed on to the leaseholder, however under the current FCA rules there is very little protection for leaseholders as they are not classed as a customer (i.e. a Policyholder).  In the report, the FCA identified the following issues:

• There is an ongoing lack of transparency and disclosure for leaseholders from both the insurance and property sectors. Without sufficient information, leaseholders may find it difficult to understand and challenge costs passed on to them.
• Leaseholders, and others in similar positions, are not classed as customers within the FCA’s rules. This means there is no explicit requirement for insurance firms to consider their interests when designing and distributing policies.
• The increases in absolute commission earned by brokers, freeholders and property managing agents may be disproportionate to increases in service costs.
• Overall concerns with remuneration practices in the multi-occupancy buildings insurance market.

The FCA committed to consulting on improved information disclosure for leaseholders and on changing the way its rules require firms to consider leaseholders’ interests.

The Department for Levelling-up, Housing and Communities (DLUHC) also announced their intention to introduce legislation prohibiting managing agents, landlords and freeholders from taking commissions and other payments when they take out buildings insurance, and to improve information disclosure for leaseholders. The revised FCA rules are intended to work alongside the planned legislation.

Following a period of consultation, the FCA have issued their final rules which take effect from 31^st December 2023.

What the FCA is expecting to achieve

The FCA is looking to bring about changes to the market so that:

• the interests of leaseholders (and others in similar positions) are properly considered when firms design their products.
• prices are fair value to leaseholders as well as freeholders.
• remuneration of all parties involved in insurance distribution has a fair relationship to the benefits provided to leaseholders.
• leaseholders have sufficient information to challenge poor practices and unfair costs passed on to them.

What’s Changed

The following changes took effect from the 31^st of December 2023, which included changes to ICOBs, Product Governance Rules (PROD) and Systems & Controls Rules (SYSC).

Improved disclosure for leaseholders:

A new section will be introduced to ICOBS Rules (Section 6A.7) requiring insurers and intermediaries to produce and provide information in relation to multi-occupancy buildings insurance policies that is intended for leaseholders.  Insurers and MGAs are required to produce the information, however, the information will need to be provided to the customer (i.e. the policyholder) by the intermediary who is in direct contact with them. This must then be passed on to the leaseholder by the policyholder.

Therefore in order to meet the requirements, Commercial Express will be producing an ‘Information for Leaseholders’ pack that will be issued with our Property Owners Policies.  We have taken the decision to issue on all property policies, for full transparency.  The pack will be a standalone document and therefore can be excluded by the broker or policyholder if not required under the regulations.

As the information needs to be disclosed promptly after the conclusion of the contract, the pack will be issued with take-up documentation for renewals and new business concluded from 31^st December 2023 onwards.

The pack has been designed to meet our disclosure requirements and should be issued alongside other policy documentation, not in place of. Firms in direct contact with the policyholder are required to provide additional information as follows:

• Remuneration information.
• The number of alternative quotes obtained (with further details that can be provided on request) with a brief explanation of why the proposed or recommended policy is in the interests of both the freeholder and leaseholders.
• Shopping around information.

Under the requirements where the leaseholder has queries or the information has not been passed on to them, we are aware that they may contact Commercial Express directly and we are required to provide them with the information without delay.  Where this happens we will notify you that we have done so.

Product Governance

Under the new rules, leaseholders will be considered as Customers.  This will mean the following changes apply in relation to Product Governance arrangements:

• Insurers, Intermediaries and brokers will specifically need to show how they have considered the position of leaseholders as a relevant part of the target market when designing, pricing and distributing their products.
• Firms will need to demonstrate products are consistent with providing fair value to leaseholders as well as any other customers. This includes considering all elements which contribute to the total price and ensuring there is a fair relationship between this and the quality of the product(s) and/or services provided including the benefits provided.

Therefore for Commercial Express, when we are carrying out new product development, making changes to existing schemes or conducting annual Product Governance assessments, we will also consider the interests of leaseholders and evidence of how the product provides fair value for leaseholders also.

Remuneration

Currently, FCA rules (SYSC 19F.2) require firms to ensure their remuneration practices do not conflict with their duty to comply with the ICOBS customer’s best interest rule. The FCA Rules will now include leaseholders and other policy stakeholders as ‘customers’ under this rule too. This will mean:

• Firms will be required to ensure their remuneration practices do not conflict with their obligation to act in the leaseholders’ best interests (as well as the policyholders).
• If a firm selects a policy based on the commission it receives where this is not consistent with its obligations to act honestly, fairly and professionally in best interests of its customer, including the leaseholder, it would be in breach of these rules.

When assessing compliance with SYSC 19F.2.2R an insurance distributor will also need to:

• consider all the remuneration it receives, whether or not it intends to retain that remuneration or make payments out of that amount to someone else. A firm will be in breach of the rules where it has arrangements to provide incentives, including partial premium refunds or commission-like payments, to third parties (including the customer taking out the policy) which may encourage the recipient of those incentives to use the services of the firm.
• consider whether the gross amount of any sum it receives by way of remuneration, whether in the form of commission or of any other type, is consistent with ICOBS 2.5.-1R (The customer’s best interests rule) rather than the net amount that the firm intends to retain.

This will also form part of our Product Development process and Fair Value Assessments.

Commercial Express is committed to providing good customer outcomes, and we will continue to review our Product Governance arrangements, target markets and fair value assessments to ensure this continues.

If you have any queries or require any further information on our approach to the new regulations, please email here to contact our Risk and Compliance department.