The Financial Conduct Authority (FCA) has been working closely with the Department for Levelling Up, Housing and Communities to address concerns around insuring high-rise buildings in the aftermath of the 2017 Grenfell Tower fire.
They concluded that the market was not working in the interests of leaseholders, regardless of the type of property they lease, for a number of reasons, including:
- Lessees’ needs not being considered: Because lessees are not the insured party and therefore not direct customers of insurers or brokers there are no obligations to consider their needs, even though they typically pay the insurance premium.
- Lack of visibility for lessees: Lessees typically have no visibility of the arrangements made or ability to challenge decision makers to ensure they are getting value for money.
- Complicated remuneration models: Extended distribution chains, including Property Managing Agents and freeholders, are receiving a share of money paid by leaseholders with no obvious link to the work they are doing.
As a result, new rules will apply to contracts concluded from 31st December 2023, including new business or renewals but not mid-term amendments. This has wide-reaching implications for all parties involved in leasehold insurance, including insurers and brokers.
We’ve answered some key questions below.
Under what circumstances do these new rules apply?
The rules apply to buildings insurance for any UK leasehold dwelling, regardless of the type of building, or its height. They aren’t limited to blocks of flats or units with multiple occupancy. There are also no exceptions for large risks.
However, there are some instances where the rules don’t apply, including:
- To commercial properties or dwellings which are let to businesses.
- To rented properties where the tenants pay general rent and don’t have an itemised cost for insurance.
What exactly is changing?
- New disclosure documents will need to be produced by brokers and insurers
The FCA has set out broadly what content is required in these new disclosure documents, but not the format or layout, so interpretations will vary.
Content should be:
- designed for a consumer audience
- less technical than current materials, which are designed for the insured customer
The expectation is that NIG, as the manufacturer, will send our content to the broker who will collate this with their own content.
This combined material must be sent by the broker to their client, e.g. a property managing agent or freeholder, with a clear message that it also needs to be sent on to each eligible tenant. It can be sent alongside other documents but must be clear and delivered via a durable medium.
Disclosures must be sent as soon as reasonably practical after the conclusion of the contract. There is no requirement to send updated disclosures on mid-term amendments.
If the tenant does not receive the disclosure, they can approach NIG or our brokers for the material. But, if we are asked for it, we will redirect the tenant to the broker, as we will not have the full document or any way to determine if they have a right to receive the information.
Full details of the content to be included in disclosure is summarised below but can also be found in the FCA Handbook here:
| From manufacturer (insurer) | From distributor (broker) |
|---|---|
| Summary of the cover (ICOBS 6A.7.5R) name of the insurance undertaking and its regulatory status; type of insurance; main risks insured; summary of excluded risks; the insured sum, together with: a) in the case of a flat, the amount for which the building containing it is insured under the policy and, if specified in the policy, the amount for which the flat is insured under it; and b) in the case of a dwelling other than a flat, the amount for which the dwelling is insured under the policy; excesses; term or duration of the policy including the start and end dates of the contract; exclusions where claims cannot be made; and significant features and benefits. | Remuneration information (ICOBS 6A.7.8R, ICOBS 6A.7.9R & ICOBS 6A.7.10G) The remuneration information must include: the total commission that the firm and any associate receives; and any remuneration or other financial incentive offered or given by the firm to any third party, including the freeholder or anyone acting on their behalf, in particular where the firm knows, or should be reasonably aware, that the sum will be included in the amount a leaseholder would be liable to pay, in connection with the multi-occupancy building insurance contract. The disclosure must be in cash terms (estimated, if necessary). The disclosure should include all forms of remuneration or financial incentive, that would or could be received by the firm, its associates or any third party, in connection with a multi-occupancy building insurance contract, whether before or after the conclusion of that policy. This would include arrangements for sharing profits or where the remuneration is contingent on future events such as payments that rely on certain targets being met. |
| Pricing information (ICOBS 6A.7.6R & ICOBS 6A.7.7R) The pricing information must set out the total premium for the policy and include: the amount of insurance premium tax; the amount of value added tax; and a breakdown of the premium at: a) (in the case of a flat) building level and (if specified in the policy) the flat; and b) (in the case of a dwelling that is not a flat) at dwelling level. Where a firm is unable to identify the specific amount of premium at building or dwelling level, the firm may provide an estimate of the breakdown of the premium for that building or dwelling. A firm relying on estimated figures must take reasonable care when producing the estimate to ensure the leaseholder can rely upon the amount to understand the building or dwelling level premium. | Placement and shopping around information (ICOBS 6A.7.11R, ICOBS 6A.7.12R and ICOBS 6A.7.13G) The information required must include: the number of alternative policy quotes the firm obtained from: a) the insurance undertaking with which the multi-occupancy building insurance contract was taken out; and b) any other insurance undertaking(s); and an explanation of why the particular multi-occupancy building insurance contract taken out was consistent with the interests of both the customer and the leaseholder. A firm must, on request from a customer or a leaseholder, provide further details about the quotes it obtained. The explanation may be adapted according to whether the firm provided a personal recommendation in relation to the policy or not. It would be expected that where a personal recommendation has been provided, the explanation will set out why the particular policy was presented as suitable for the customer, taking into account its level of cover and cost, and relevant exclusions, excesses, limitations and conditions. Whether or not the policy was taken out following the provision of advice to the customer, the explanation should provide sufficient detail to enable the customer and leaseholder to understand why the particular policy was proposed. |
| Conflicts of interest information (ICOBS 6A.7.14R, ICOBS 6A.7.15R, ICOBS 6A.7.16G) The information must include: whether the firm has a direct or indirect holding representing 10% or more of the voting rights or capital in a given insurance undertaking;whether a given insurance undertaking or its parent undertaking has a direct or indirect holding representing 10% or more of the voting rights or capital in the firm; and whether the firm is representing the customer or is acting for and on behalf of the insurer. |
- Customers should be provided with fair value for any distribution arrangements made
While there are no new specific rules around remuneration, other than the disclosures described above, there is a continuation of themes the FCA has been raising for a while around providing fair value to customers.
Where there are distributors, each one must assess and only receive an amount that provides fair value, including any fees and charges added. Extended distribution chains bring extra concerns if each is adding cost to the customer.
- Policy stakeholders have been introduced by the FCA
A policy stakeholder is a natural person who is not the policyholder but does have an interest and/ or benefit in the subject matter of the insurance and has an obligation to pay the premium and any other costs connected to the distribution.
The current specific application of the term is that there are additional disclosures for leaseholders, who are an example of policy stakeholders. There will be other examples of policy stakeholders who are not leaseholders. In such cases, it would be appropriate to consider those types of customers when considering target market for products and distribution, as well as when assessing fair value. However, no additional disclosures are required now.
Want to know more about the new rules? Speak to your usual NIG Contact