Dear Secretary of State | Release Date: 21st April 2023
To read a shorter summary of this Dear Secretary of State letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has provided an update to the Secretary of State on the multi-occupancy buildings insurance market, following a comprehensive report published in September 2022. The report highlighted significant issues contributing to high insurance costs for residential leaseholders and proposed a set of remedies and recommendations for both the insurance industry and the government.
Market Analysis and Ongoing Concerns
The FCA’s 2022 report revealed that the lack of transparency and conflicts of interest, particularly involving insurance brokers and other parties such as property managing agents and freeholders, significantly inflate insurance costs for leaseholders. These parties often receive undisclosed commissions that are not aligned with the interests of the leaseholders.
Progress on Remedies
Since the publication of the report, the FCA has been actively working to address the problems identified:
Improved Information Disclosure: The FCA is consulting on enhancing transparency for leaseholders, ensuring they have comprehensive information about insurance policies, potential conflicts of interest, and remuneration details of brokers.
Changes to Regulatory Requirements: Proposals are being considered to modify FCA rules to require firms to better consider leaseholders’ interests when designing and offering insurance products.
Insurance Broker Remuneration Review: The FCA has conducted a review of how insurance brokers are remunerated, finding substantial increases in absolute remuneration levels despite reductions in commission percentages, indicating a significant profit margin that impacts the overall cost of insurance.
Key Findings from the Multi-Firm Review
Rising Broker Remuneration: There has been a nearly 40% increase in broker remuneration over the reviewed period, raising concerns about the proportionality and fairness of these fees.
Lack of Fair Value Evidence: Many brokers failed to demonstrate that they consistently deliver fair value or consider leaseholders’ interests adequately, leading to potential conflicts and misaligned incentives.
Regulatory Actions and Expectations
The FCA is taking decisive actions to rectify these issues:
Regulatory Interventions: Firms showing significant weaknesses in meeting regulatory obligations will face interventions, including possible skilled person reports to ensure urgent remediation.
Attestation Requirement: A Senior Manager Function holder will be required to attest that the firm consistently delivers fair value.
Prohibition of Unjustified Commissions: Immediate cessation of commission payments to third parties without proper justification is expected, with ongoing reviews to enforce compliance.
Consultation and Legislative Recommendations
The FCA’s consultation paper proposes several key rule changes aimed at safeguarding leaseholders’ interests and ensuring they receive fair value:
Product Design and Value: Ensuring insurance products meet the needs of leaseholders and provide fair value.
Prohibition of Conflicting Remuneration Practices: Banning remuneration models that conflict with the interests of leaseholders.
Collaboration with Government
The FCA is working closely with the government to ensure that legislative measures align with regulatory actions to maximise benefits for leaseholders. This includes potential legislation requiring freeholders and property managing agents to disclose detailed insurance policy information to leaseholders and possibly regulating their remuneration.
Conclusion and Next Steps
The FCA remains committed to transforming the multi-occupancy buildings insurance market to protect leaseholders from undue costs and ensure transparency and fairness in insurance provisioning. By Autumn 2023, the FCA aims to finalise the new rules following the consultation process. Meanwhile, the collaboration with industry bodies and the government continues to develop effective solutions, including risk pooling mechanisms and a reinsurance scheme planned for launch in Summer 2023. The FCA encourages proactive engagement from all stakeholders to address the systemic issues identified and improve outcomes for leaseholders.