FCA Multi Occupancy Leasehold Insurance Rules effective 31.12.23

YOUR COMPLIANCE MATTERS – FCA Multi Occupancy Leasehold Insurance Rules effective 31.12.23

Relevance:                   All Firms.

Action required:         Prepare for additional disclosure Rules and review your approach to commission, and your commercial arrangements with any parties receiving a share of your remuneration.

Following consultation, in April 2023, the FCA has published new Rules in Policy Statement PS23/14: Multi-occupancy building insurance: Feedback to CP23/8 and final rules (fca.org.uk) relating to the treatment of Leaseholders in Multi Occupancy buildings.

 The new Rules come into effect for contracts renewing, or incepting, from 31.12.23.

 A ‘Leaseholder’ is a tenant within the meaning of section 30 of the Landlord and Tenant Act 1985 including a recognised tenants’ association. The Rules will also apply to a ‘policy stakeholder’, being any individual obliged to pay premium. For simplicity we have used the term ‘Leaseholder’ in the remainder of this newsletter.

 To be clear, the Rules do not apply to Commercial Leaseholders.

 One point to note from the Consultation was the very high level of input from Leaseholders themselves (generally pushing for more rapid implementation). You should therefore expect a good level of awareness amongst leaseholders, so expect to be called out if you do not comply. You also need to ensure that your staff clearly understand the Rules.

 Leaseholders as customers

 Leaseholders will need to be treated as ‘customers’, requiring firms to act in the best interests of the leaseholder and bar firms from recommending products based on commission or remuneration levels.

Disclosure

Insurers and brokers will need to provide additional information to Leaseholders, as soon as reasonably practical following conclusion of the contract, including:

• A summary of the features of the policy, including main benefits, coverage and exclusions of the policy, duration and insured sum (produced by insurer).

• The policy premium. Where the policy covers a portfolio of buildings, firms must disclose the premium at building or dwelling level (this can be an estimate and is to be produced by insurer).

• Remuneration (including contingent commission and potential profit share) which any authorised intermediary receives for arranging the insurance, as well as remuneration they pay to other parties including unregulated Property Managing Agents (PMAs) and freeholders (all to be stated in cash terms).

• Information about potential conflicts of interests, such as ownership links between the intermediary and the insurer.

• The number of alternative quotes the intermediary has 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.

 This information can be sent to the Policyholder or PMA, with an instruction to distribute it to Leaseholders (or sent direct to the Leaseholder if you are in touch with them). The FCA has not prescribed a format for the disclosures.

 You will be expected to deal with queries, either from the Policyholder, or any Leaseholder, in a way which ensures ‘Good outcomes’ for all parties. So, if the Freeholder or PMA has failed to provide the required information, and you are asked for any of the information by a Leaseholder, you will be expected to respond to them.

 Product Governance

 The FCA is changing the PROD rules to include leaseholders as customers for the purposes of PROD 4. This would require insurers and intermediaries to:

• 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 as well as any other customers. This means there must be a fair relationship between the total price and the overall benefits leaseholders receive.

 The FCA has stated that they expect these rules to have an impact on current remuneration practices. Intermediaries who receive percentage-based commissions that have increased in absolute amounts as risk premiums have risen would likely need to reduce the percentage they receive. Earnings that increase purely because of premium increases would be unlikely to reflect additional benefits provided to leaseholders, so would not meet FCA fair value requirements.

 Additionally, firms would need to consider the amount of remuneration they share with other parties in the distribution chain, such as freeholders and PMAs. The Rules would not allow such payments unless firms can demonstrate they provide fair value to leaseholders.

 Action Required

 You will need to identify cases impacted by the new Rules, prepare appropriate disclosure processes and formats and be ready to field queries from Leaseholders.

 As always, we are happy to discuss any issues arising.