FCA Residential Leasehold Building Reforms – JPIC Group Review

The FCA has announced the implementation of a new policy for regulated entities in dealing with insurance of multi-occupied buildings.

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FCA Residential Leasehold Building Reforms – Multi-Occupancy Buildings Insurance Policy Statement “PS23/14”

The FCA has announced the implementation of a new policy for regulated entities in dealing with insurance of multi-occupied buildings.  This follows the Regulator’s consultation process conducted earlier this year.

The intention of the rules is clear – insurers and brokers (regulated entities) must;

  • Demonstrate the insurance product represents fair value including all elements of the price relative to the product and the services provided.
  • Reduce the commission percentage if premiums rise unless the services justify it.
  • Justify payments to others in the chain e.g., freeholders, based upon fair value.

Leaseholders should be provided with sufficient information to challenge unfair practices in remuneration and premium recharges and insurers must take into account the needs of leaseholders when developing insurance products.

JPIC put forward several observations in response to the consultation and we are pleased to report that a number of them have been recognised by the FCA in putting forward the final rules statement.

Specifically, we asked for:

  • Clarity on implementation timescales and no retrospective requirement for disclosure of information.
  • Confirmation of whether the FCA intended the policy to apply to all multi-occupied buildings or residential only.
  • Recognition that captives can be of benefit to landlord and leaseholder alike and should not be included in the requirement for disclosure of remuneration.
  • A uniform requirement to disclose information regardless of the size of the property to avoid the need for bespoke systems to be developed.

The new FCA policy comes into effect on 31st December 2023 and applies to contracts of insurance that are put into place from that date onwards (so it’s not retrospective).

The key points of the new policy are:

  • It applies only to residential multi-occupied buildings (the definition of policy stakeholders is reworded to reflect this).
  • Any insurance policy on a multi occupied residential building must take into account the needs of the leaseholder and must represent fair value.
  • Disclosure is the responsibility of the regulated businesses i.e., the insurers (for policy coverage and premiums split by property) and brokers (for remuneration, conflicts of interest and details of alternative quotes sought and the justification for placing the insurance with any given insurer).
  • Disclosure should include the main benefits of the policy and exclusions as well as remuneration behind the scenes and premiums – but there is no requirement to split premiums down to individual unit level and if the insurer has insufficient information for an accurate split per building, an estimate will suffice.
  • Captive participation is excluded from the requirement for disclosure.
  • There is no requirement to provide information relating to overseas placements (because the FCA has no jurisdiction outside of the UK).
  • Disclosure must
    • Support leaseholders with clear information to help understand how premiums are made up.
    • Enable leaseholders to challenge unfair payments, insurance placements and conflicts.
    • Increase the pressure upon regulated entities to manage conflicts effectively.
  • The price of the insurance must represent fair value to leaseholders and freeholders alike.

JPIC’s view is that the FCA has gone as far as it can to regulate the recharging of insurance premiums to residential leaseholders.  Repeatedly in the policy statement the phrase “fair value” is used. There is recognition that remuneration exists in the distribution chain, but the onus is upon insurers and brokers (and any landlords who are FCA regulated), to ensure fair value and provide clear information to enable leaseholders to challenge poor practices.

It is pleasing that the FCA have listened to the representations made by JPIC and others in response to the consultation process, especially in clarifying that only residential leases are affected, and that the new policy applies only to policies placed on or after 31st December 2023.

The onus is upon regulated entities to comply with the policy – the FCA has no jurisdiction over organisations it does not regulate.  However, the Government continues to look at legislation that would bridge this gap and potentially, remove the right of landlords to include remuneration within premium recharges to tenants.

For Real Estate clients, the immediate challenge going forward into next year, will be to show that premiums and the impact upon them of remuneration in the distribution chain, can be justified as giving fair value to the leaseholders who pay them.

If you would like to discuss this matter further, please contact Neil Timberlake.