FCA Proposes Changes to Multi-Occupancy Buildings Insurance

The Financial Conduct Authority (FCA) has published a review and consultation paper proposing changes to better protect leaseholders and offer fair value.

The review identified significant shortcomings in the work carried out by some brokers as well as a substantial rise in commissions paid to third parties, including property managing agents and freeholders. On average, the commissions paid to brokers per policy rose by 46% over the review period, with little evidence to suggest any value to justify these payments. In addition,16 of the firms sampled – which account for 35% of the market- did not provide sufficient evidence that they consistently offered fair value. In many cases, these issues with were a result of a lack of assessment, analysis of costs, as well as inadequate scrutiny of the commission paid.

What are the proposed changes?

Following the review, the FCA expects brokers to immediately cease payments to third parties unless they have appropriate justification and evidence for doing so in line with the regulator’s rules on fair value. The FCA will also be taking appropriate action where firms have shown significant weaknesses in meeting their regulatory obligations, as Sheldon Mills, Executive Director of Consumers and Competition, states:

“We want to give leaseholders more rights and the information they need to exercise them. Importantly, under our proposals those selling multi-occupancy insurance will have to act in leaseholders’ best interests.”

“We are taking action against these practices, and we won’t hesitate to take further action if brokers don’t comply with our rules.”

Under the proposals, leaseholders would be defined as “customers of buildings insurance”. The rule changes would explicitly require insurance firms to act in leaseholders’ best interests. This would also include barring firms from recommending a policy based on commission or remuneration levels. Insurers and brokers would also need to provide more information about insurance policies to leaseholders, including detail of any commission paid.

In addition to these changes, the Department for Levelling Up, Housing and Communities (DLUHC) also announced their own intentions to ban payment or sharing of commissions with property managing agents, landlords and freeholders.  The FCA has also stated that they will be working with the DLUHC to ensure this is done effectively and consistently alongside its own rules, which are subject to change if needed.

What are the next steps?

The FCA have stated that they see no evidence for any additional specific rules around broker remuneration beyond those proposed in the consultation paper and already in place under PROD, and under the new Consumer Duty upon its implementation. Instead, focus is drawn towards firms ensuring they are meeting existing rules, including PROD rules introduced back in 2021.