YOUR COMPLIANCE MATTERS – Potential FCA interventions to reform the Multi-Occupancy Buildings Insurance Market

YOUR COMPLIANCE MATTERS – Potential FCA interventions to reform the Multi-Occupancy Buildings Insurance Market

Relevance:           All firms arranging insurance for Multi Occupancy properties.

Action required: Review your involvement, and the risks arising from excessive commission payments in the distribution chain to Leaseholders

The FCA wrote to firms, in February 2022, regarding the increased insurance costs relating to multi-occupancy buildings, particularly those with flammable cladding.

One of the major concerns was that premiums were increasing, leading to an increase in commission without the intermediary necessarily undertaking any additional work to justify the additional cost.

The FCA view is that Leaseholders are not being considered as customers although they will ultimately pay for the insurance, including any frictional costs/commission absorbed by the Property Managing agent, the Freeholder, and the Broker.

Since that time, the FCA has undertaken further research, both via surveys provided by insurance intermediaries, and by “round table” sessions which engaged with Leaseholders, Freeholders, and the insurance market.

Although the sample size was relatively small, there were sufficient concerns raised to force the regulator to consider how matters can be improved.

They have, therefore, published a report (21 September 2022) detailing their findings and potential remedies to resolve the issues they perceive in the market. The full report can be found here FCA sets out potential interventions to reform multi-occupancy buildings insurance market | FCA

Current Rules

They start by reminding firms that Product Manufacturers must provide products which provide fair value. Intermediaries must ensure that they do not apply excessive costs which could prevent the product from providing fair value to the end user.

The FCA accepts that the Freeholder is usually considered to be the customer. However, Leaseholders ultimately pay the premium and should be considered in the process.

The Regulator has already identified cases where there is significant commission being taken by the Freeholder/Property Managing agent, in addition to that being retained by the insurance intermediary. The concern is whether the level of remuneration fairly reflects the workload undertaken by the various parties in the distribution chain.

Potential Remedies

In addition to the existing rules, the regulator is considering a number of approaches to improve the way the market operates.

The FCA accepts that it can only influence the activities of regulated entities (the insurer and the insurance intermediary) whereas there are parties involved in the process, including the Property Managing agents/Freeholders which may not be regulated by the FCA.

• Risk Pooling - For high-risk buildings, particularly, those affected by flammable cladding, this may provide a solution to the industrywide lack of capacity. The FCA is recommending that the ABI continues to work with the government on this specific issue.

• Increased Transparency for Leaseholders – The regulator plans to consult on potential changes to the disclosure requirements to Leaseholders in relation to the total cost of the insurance product offered to the Freeholder.

• Making Leaseholders ‘Customers’ within the FCA Rules – extending the definition of a “Customer” to include Leaseholders in multi-occupancy buildings, would impact the application of PROD and ICOBS rules requiring appropriate disclosures and fair value to the Leaseholder, as well as the Freeholder. Currently, the new Consumer Duty, effective in July 2023, does not include Leaseholders – the regulator could choose to include them.

• Rules on Remuneration – The regulator is consulting on preventing authorised firms paying commission to Freeholders, Property Managing agents and others. They are also consulting on banning remuneration which is a percentage of the overall premium in order to prevent firms earning undue commission without a commensurate increase in their workload.

Other Recommendations

There are a number of other alternatives considered in the paper, some of which will need to be taken forward by the ABI/BIBA or the government because they are outside the scope of the FCA’s authority.

Action Required

Given the increased focus on this particular market, we would recommend that every broker firm creates a register of Multi-occupancy property insurances arranged, any party beneath the broker firm itself which is paid commission, and the total cost versus the total remuneration, applicable to any Leaseholder down the line.

Firms need to ensure that they have a robust process to identify whether they are continuing to cause a problem in this market or whether they are part of the solution.