The UK Government and the Financial Conduct Authority (FCA) have been working for some time on new rules affecting multi-occupancy residential buildings, and these new rules are now coming in to force on 31 December 2023 for the whole of the UK. A policy statement by the FCA which includes the final rules and comments from feedback provided by the industry can be found here PS23/14: Multi-occupancy building insurance: Feedback to CP23/8 and final rules (fca.org.uk). The Government has advised that it intends to legislate as soon as possible to go further than these rules, and ban the payment of commission to third parties altogether and consider whether it is possible to extend the rights of leaseholders in decision making for buying and renewing insurance.
Why have these changes been made?
Following the tragic events at Grenfell in 2017, the Government has become concerned about the significant increases in premiums being charged to multi-occupancy residential buildings, with a particular issue for those with combustible cladding who have struggled to obtain insurance at all or only at extremely high premiums and with several onerous conditions and excesses. Following investigations by the FCA (CP23/8: Multi-occupancy building insurance (fca.org.uk), Multi-occupancy buildings insurance broker remuneration (fca.org.uk), Report on insurance for multi‑occupancy buildings (fca.org.uk)), it was felt that there were many examples of poor outcomes for leaseholders of these buildings, and intervention by the regulator to protect leaseholders was required. Leaseholders pay for and have an interest in the insurance policy, but have limited information about the policies in place. Further concerns have been raised regarding commission sharing with third parties, and whether both these sharing arrangements and total commissions being received are appropriate or whether commissions are forcing leaseholders to pay more for their insurance. The new rules will allow leaseholders to receive the same information as policyholders, and understand who in the chain is receiving commission and how much. Leaseholders will not have additional decision making rights, and the changes are instead designed around transparency.
Who is affected?
All multi-occupancy residential buildings are affected, where the leaseholders contribute to the insurance premium through the service charge or through separate payment. There are several models for how insurance is bought in this area, and all models for freeholders, landlord and property agents will be affected, including those:
- Directly authorised by the FCA
- Appointed Representatives
- Exempt Professional Firms (such as via RICS)
- 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
What are the new rules?
The FCA’s new rules affect the disclosures that need to be made to leaseholders, and also require regulated firms to include leaseholders when considering their fair value and best interest obligations.
Disclosures
Insurance brokers will be required to disclose key information to leaseholders, and will be asking freeholders, property agents or others placing the insurance to pass on this information. These disclosures will include:
- Summary of cover including sums insured, excesses, duration of the contract and exclusions
- Pricing information including taxes
- Remuneration information including any payments to third parties
- Why we have recommended a certain insurer and whether we approached other insurers and who, ensuring we consider whether the policy is appropriate for both the leaseholder and the policyholder
- Any conflicts of interest by virtue of insurers having an ownership in our business
If a leaseholder contacts us directly, we must provide this information to them promptly and clearly. Otherwise, the information needs to be provided promptly after the conclusion of the contract.
Fair value
Insurance brokers will be required under the new rules 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, with pricing and coverage being important considerations when making this judgement
As remuneration via commission is an important part of price, insurance brokers will need to consider whether both the total commission being received and any commission being paid to third parties, is affecting whether the leaseholder receives fair value, and insurance brokers will only be allowed to pay commission to third parties where it can prove this value in terms of the overall pricing, considering any work the third party does.
Conclusion
These regulatory reforms are the most significant to ever take place in the multi-occupancy buildings insurance space, and regulated firms have been given a very short period to prepare for them. As these are new rules, it will take some time to fully understand the FCA’s intentions. We are committed to embracing this new regulatory environment and ensuring that leaseholders form a key consideration when placing this type of insurance in the future, and we will act in a positive and transparent manner at all times. As experts in blocks of flats and residential property, we are able to advise and assist you with compliance of the new rules, and ensuring you are able to compete and thrive in this regulatory environment.
