In September, the FCA published a Policy Statement (PS23/14)1 regarding its proposed rule changes to address leaseholder harms identified in the multi-occupancy building insurance market. Of particular interest, the Policy Statement clarifies that the proposed new rules will not apply to commercial leaseholders or commercial policy stakeholders.

Background

In 2022, in response to a request from the government, the FCA published a report on insurance for multi-occupancy buildings. It found that there was a risk of poor outcomes for leaseholders, who bear the costs of increasing premiums, but have little influence over the choice of broker or insurer.

Following the report, the FCA consulted earlier this year 2 on its proposed remedies to address these issues in the multi-occupancy building insurance market. The proposals focussed on transparency, product design and remuneration practices.

In response to the feedback it received, the FCA published Policy Statement PS23/14, which sets out the final relevant rules and provides various further explanations and clarifications.

Application to commercial leaseholders

In particular, the FCA has acknowledged that the proposed new rules (as drafted in the earlier consultation paper) would capture commercial leaseholders as well as residential. However, the FCA has now stated that this was not its intention.

As such, the FCA has amended the final rules to reflect that the new requirements will not apply to commercial leaseholders or commercial policy stakeholders. In other words, they will only capture residential leaseholders/policy stakeholders.

A high-level summary of the clarified scope of the new requirements is set out below:

  1. New disclosure rules for multi-occupancy building insurance (ICOBS 6A.7): the FCA has confirmed that the new disclosure rules will now only apply in relation to residential leaseholders (i.e. firms will not need to provide disclosures intended for commercial leaseholders). The new Handbook Glossary definition of “leaseholders” and guidance at the start of ICOBS 6A.7 will be amended accordingly.
  2. Amendments to product governance (PROD 4), customer’s best interests (ICOBS 2.5) and remuneration (SYSC 19F.2) rules:
  3. As well as clarifying that the “leaseholder” definition only covers residential leaseholders (see point 1 above), the FCA has also confirmed that commercial entities (including commercial leaseholders) will not be considered policy stakeholders. The new Handbook Glossary definition of “policy stakeholders” will be amended accordingly.
  4. The effect of this is that the requirements under PROD 4, ICOBS 2.5 and SYSC 19F.2 (which originally may have captured commercial leaseholders and/or policy stakeholders) will now only apply to (i) residential leaseholders or (ii) those in a similar position to residential leaseholders who are paying for and have an interest in the subject matter of an insurance policy. In other words, those requirements will not apply to commercial entities (including commercial leaseholders).

Application to contracts of large risks

The FCA has also clarified the proposed application of the new rules to contracts of large risks, as summarised below:

  1. PROD 4 product governance requirements: The FCA has confirmed that the product governance requirements under PROD 4 will not apply to contracts of large risks that exclusively cover commercial policyholders and commercial policy stakeholders. In other words, where all policyholders and policy stakeholders (including leaseholders) are commercial persons (i.e. they are not retail consumers), the contract of large risks exclusion may still be available in respect of the PROD 4 requirements.
  2. ICOBS 6A.7 disclosure requirements: The FCA has confirmed that the new disclosure requirements under ICOBS 6A.7 will apply to a firm distributing a contract of large risks for a commercial customer where the risk is located within the UK. In other words, the new disclosure rules apply to policies in respect of commercial customers even where is a contract of large risk. By way of example, this would cover the situation where the freeholder/landlord constitutes a commercial customer covered by a contract of large risks, but the individual leaseholders do not (the FCA’s view is that a leaseholder should be afforded the benefit of the new requirements whether or not the landlord’s policy is considered a contract of large risks).

Implementation timetable

The new rules will come into force on 31 December 2023.