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Dear CEO | Release Date: 28th January 2022

To read a shorter summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Long Summary

This letter from the Financial Conduct Authority (FCA) addresses the significant issue of rising insurance costs for multi-occupancy buildings, particularly affecting residential leaseholders. These rising costs are identified as a key indicator of vulnerability among consumers. The FCA outlines its expectations for insurance firms, intermediaries, and other stakeholders involved in the insurance distribution chain to ensure that their practices contribute to fair treatment and fair value for consumers. The communication elaborates on the duties of these entities, especially in relation to fair pricing, commission structures, and the transparency of remuneration.

The rising insurance costs in multi-occupancy buildings have prompted concerns from various stakeholders, including parliamentarians and consumer groups. These costs often result in financial difficulties for leaseholders, who typically cannot shop around for better insurance deals due to the nature of their leases. The FCA has responded by reinforcing the expectations laid out in its regulatory framework, focusing particularly on the fairness of value provided by insurance policies.

FCA Expectations for Fair Value and Customer Treatment

Fair Value Considerations

Firms are required to ensure that the price of insurance products offers fair value to customers. This involves a careful assessment of the risks associated with the property, including specific hazards like unsafe cladding. The FCA stresses that firms must not only consider the immediate costs but also the broader implications of their pricing strategies on leaseholders.

Commission Structures

The FCA criticises commission models that disproportionately increase with the insurance premiums without corresponding benefits or increased costs. It is expected that commissions should reflect a reasonable relationship to the services provided. Firms are warned against letting commission structures influence decisions against the best interests of customers.

Product Distribution and Broker Responsibilities

Brokers and other intermediaries play a crucial role in the insurance market. The FCA expects these parties to actively seek out the best insurance solutions for their clients, considering a range of products from different insurers. This includes a responsibility to manage conflicts of interest effectively and ensure transparency about the remuneration they receive.

Regulatory Guidance on Intermediation and Risk Presentation

Transparent Risk Presentation

Intermediaries must present risks to underwriters in a transparent and timely manner, including full disclosure of any fire safety issues. This practice is essential for placing insurance effectively and at fair value. Terms of engagement with the customer should also be clear and provided well in advance of policy expiration.

Managing Remuneration Conflicts

The FCA reminds firms that disclosures about commission are not a substitute for addressing conflicts of interest. If remuneration practices negatively impact the value of the product or lead to conflicts of interest, these practices must be revised. This applies to all stages of the distribution chain, including relationships with property managers.

FCA Initiatives to Support Fair Insurance Pricing

The FCA is undertaking initiatives to better understand and subsequently address the issues surrounding insurance pricing for multi-occupancy buildings. This includes:

Data Collection: Gathering information on how firms price these insurance products, focusing on the impact of commissions and other non-risk related costs.

Industry Engagement: Discussing with firms their approaches to pricing and ensuring these align with regulatory expectations for fair value.

Conclusion and Next Steps

The FCA is committed to using its regulatory powers to intervene where necessary to ensure that insurance pricing for multi-occupancy buildings is fair and provides value to the consumers most affected, particularly residential leaseholders. Firms are expected to review their pricing and commission strategies to align with the FCA’s guidance on fair value and customer treatment.

Key Takeaways and Actions

Review Pricing Strategies: Firms should ensure their pricing models are justified and provide fair value.

Assess Commission Structures: Commissions should reflect the actual costs and benefits of the services provided and not lead to conflicts of interest.

Enhance Transparency: Firms must be clear about their remuneration and ready to provide details to customers upon request.

Engage with FCA Initiatives: Participate in FCA data collection efforts and discussions to contribute to a fairer insurance market.

This letter serves as both a directive and a reminder of the obligations firms have towards providing fair and transparent insurance solutions, particularly in a sector that impacts a vulnerable segment of consumers significantly.

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