September 13, 2022
The FCA has set out a range of recommendations designed to provide leaseholders with greater protection from high prices and to ensure the multi-occupancy buildings insurance market operates more effectively. It has published a brief web page, in addition to the press release, summarising the key issues and findings. Also, in response to the FCA’s report, Simon Clarke (the new Secretary of State for Levelling Up, Housing & Communities) has written to the ABI, the FCA and BIBA urging action. The ABI has responded accordingly, and BIBA members can view BIBA’s response here.
Following the Grenfell tragedy, the cost of buildings insurance to residential leaseholders and other property owners of multi-occupancy buildings has increased and the FCA conducted a review to explore ways to provide better value cover for leaseholders and issued a report.
Key findings include:
- the supply of insurance for mid- and high-rise multi-occupancy residential buildings has significantly contracted
- between 2016 and 2021 premium rates have more than doubled
- there is a lack of transparency, and increased costs, for leaseholders
- competition is not working effectively for customers – solutions to this issue need to be developed, including pooling arrangements and possibly Government backed support, with the threat of a market study or referral to CMA for more intensive work if there isn’t improvement in the market.
- some broker commissions are high and the FCA will be doing further work with these firms; reducing commissions will make affordable insurance cover more widely available.
- In relation to commissions the FCA said “The commission rate paid by the insurer to the broker varies significantly. In most cases within the observations we received and used for our analysis it is at least 30% (they range from <10% to 62%). The level of some commissions in this market are an area of significant concern.”
- other findings on the regulation of insurers and brokers
- Insurers do not seem to be making excessive profits
There is reference to “fair value” throughout (although acknowledgement that it is difficult with all the various factors to assess whether a premium is fair).
There is recognition that some commission is paid away to freeholders and property management agents which are outside of FCA regulation; the FCA therefore recommends that the Government supports the FCA to make changes to the rules, such as possibly including a ban on payments to unauthorised parties. Banning commission payments is a mechanism that the FCA already employs in certain circumstances (for example, the distribution of funeral plans).
There is a short consultation period (reply by 31st October) on whether there should be more disclosure to leaseholders and whether leaseholders should be defined as “customers” and hence brought more within the FCA’s rules (this potential inclusion of leaseholders within the definition of ‘customers’ would bring those leaseholders into ICOBS requirements scope).
Although the FCA received a large amount of data from brokers and insurers (which was a limited sample of brokers and insurers to begin with), much of this was unusable so the FCA has had to review a small sample (although this still probably supports their high-level observations). The FCA is looking for the industry to get better at recording data.
In addition to interventions and actions set out in the report, the FCA plans to conduct further analysis of the insurance market for multi-occupancy buildings. Stakeholder feedback on the questions set out in the report is welcomed and comments can be e-mailed to .
Where the FCA considers that the harms identified can be addressed through rule changes, it will consult on them in due course. The FCA will provide an update on progress towards potential remedies in six months.
Taking into account the findings and observations above, firms operating in this market should:
- pay particular attention to fair value assessments for these products;
- review remuneration arrangements and levels across the board, to be in a position to react to any potential FCA intervention in this regard;
- review the data and information that is gathered and retained in relation to these contracts and their distribution, including who is involved in the distribution chain, where remuneration is paid, and commission levels.