Belinda Bagnall from Residentsline discusses the new regulations issued by the Financial Conduct Authority.

As the Financial Conduct Authorities new regulations with regards to multi-occupancy residential buildings insurance come into effect, leaseholders will be given new levels of clarity.

The new rules kick in from 31st December 2023 and bring with them a few positive changes for UK leaseholders. Here we’ll be focussing on the new requirements for transparency and fair value when it comes to commission and renumeration in the insurance sector, and how the new rules will empower leaseholders and boost competition.

What Started All of This?

For years, leaseholders have been frustrated at their lack of control over their insurance. They foot the bill, but are not a part of the decision-making process and, until now, were not considered a ‘stakeholder’ in the eyes of the industry. This is why, in January 2022, Michael Gove (the Secretary of State for Levelling Up, Housing and Communities) ordered an inquiry into the building’s insurance market. In May 2022, the Financial Conduct Authority announced that they would be collecting data on ‘fair value’ for leaseholders. In this review of the market, they found that almost a third of the cost of insurance premiums could be made up of commission and fees (inflated by unscrupulous freeholders agreeing to higher premiums in return for a share of the brokers’ commissions) and that service charge demands were not transparent enough for this to be easily spotted and challenged by leaseholders.
In his letter to the FCA in response to the FCA’s findings, Michael Gove said: “I will take action to ban managing agents, landlords and freeholders from taking commissions and other payments when they take out buildings insurance, replacing such payments with more transparent fees. I will press insurance firms, managing agents, landlords and freeholders to change their practices as a matter of priority.”
Having laid out their proposed changes and received feedback from the industry, the FCA has now finalised the new rules which will be in place ready for 2024. They include naming leaseholders as ‘stakeholders’ so that fair value regulations now apply to them too, as well as a required disclosure document that must be supplied to leaseholders once a policy is put in place.

Full Disclosure

The rules state that, from 31st December 2023, firms must provide detailed information re the product and their services once a policy is purchased. It must be compiled and provided to the policy-buyer, with clear instructions that it must also be passed on to all leaseholders. If it’s not passed along as instructed, leaseholders are able to contact the firm to request their assistance.
“We consider it important that firms disclose any remuneration they or others may receive in relation to the multi occupancy building insurance contract in question. This includes remuneration such as contingent commissions or profit-shares which may only be earned or paid after the contract is concluded. We are including additional guidance to clarify what is required to be disclosed (estimated if necessary). Our proposed rules were intended to give leaseholders access to the right information to enable them to understand the arrangements and challenge insurance costs which have been incurred through poor practices, without creating significant additional costs that could be passed on to leaseholders”

The details must include:

  • A summary of the features of the policy, including main benefits, coverage and exclusions of the policy, duration and insured sum.
  • The policy premium- where the policy covers a portfolio of buildings, firms must disclose the premium at building or dwelling level.
  • The remuneration which any authorised intermediaries received for arranging the insurance, as well as remuneration they pay to other parties (including unregulated Property Managing Agents and freeholders).
  • Information about potential conflicts of interests, such as ownership links between the intermediary and the insurer, and about the insurers with whom the intermediary may place the policy.
  • The number of alternative quotes they have 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.

Responsibility for producing the information will be split between the insurer and intermediary:

  • The insurer would be responsible for providing the policy summary and pricing information.
  • The intermediary would be responsible for producing remuneration, conflicts or interests and placing and history information.
The information must be disclosed “as soon as reasonably practicable after the conclusion of the contract” which some leaseholders may be frustrated by. In response to feedback received along these lines, the FCA states their reasoning for the rules around timing:
“Although we understand leaseholders want to have information as early as possible, we do not think providing information before conclusion would produce any benefits compared to providing it after. Leaseholders are generally only able to challenge insurance costs once they are charged to them by the freeholder. Providing information earlier could increase costs which would be likely to be passed on to leaseholders. We understand that the current market position means more complex insurance contracts are often only concluded shortly before they come into force. Adding work into that process before a contract is concluded would increase the risk of the building going uninsured.”

Competition Boost

The disclosure document will certainly provide leaseholders with the opportunity to spot and challenge any problematic renumeration, but it will also enable them to compare their coverage and policy details with other products available on the market. This is expected to have a sizeable influence on the levels of competition in the sector, which may well drive prices down for leaseholders too.
“We consider our new rules are compatible with advancing the FCA’s secondary international competitiveness and growth objective. By requiring firms to ensure their products are consistent with the needs of leaseholders and other policy stakeholders, and are priced and remunerated for, in a way that provides fair value, we hope to promote fairer and more effective competition in the UK insurance market.”
Overall, the new regulations are set to have a positive impact on leaseholders and shake up the buildings insurance industry. With clearer guidance around who is considered the stakeholder and the need to disclose all the renumeration and commission involved, firms will have little choice but to clean up their act. Head to the Residentsline website for information on all of our products and services or, if you’d like to speak to one of our fantastic, specialist team, give us a call on 0800 281 235.