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Dear Secretary of State | Release Date: 10th May 2022

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

To access the original FCA document, clear here.

Long Summary

The Financial Conduct Authority (FCA) has provided an update on its ongoing review of the insurance market for multi-occupancy buildings, particularly in response to concerns about rising insurance costs for residential leaseholders in the UK following the Grenfell tragedy. This review aims to uncover the causes behind the significant year-on-year insurance cost increases and the marked restriction in coverage availability.

The FCA has initiated extensive data gathering from insurers and intermediaries dating back to July 1, 2016. This includes engaging with industry stakeholders through meetings and workshops to understand their pricing strategies and the fair value of products offered. The FCA aims to identify potentially unfair practices through both quantitative and qualitative analysis. This initial phase of data collection will help the FCA to develop more informed options for potential interventions

Data Gathering and Industry Engagement

Market Context

The FCA outlines the complex nature of the insurance market for multi-occupancy buildings. It highlights that unlike typical home insurance, the leaseholders do not directly interact with insurers but deal with freeholders, who act as the customer to insurance companies. This relationship dynamic creates unique challenges in regulating and intervening in the market.

Potential Harms Identified

The FCA has identified several potential harms affecting leaseholders:

  1. Pricing and Product Supply Issues: Insurers may be withdrawing from the market or charging high premiums due to perceived risks associated with building safety and quality. This has reduced competition and possibly led to unfair pricing practices.
  2. Distribution Issues: There are concerns that freeholders, property managers, and brokers might prioritise their own financial gain over the value provided to leaseholders. This includes potential conflicts of interest where these parties might choose insurance policies that offer them the highest commissions rather than the best value for leaseholders.

Possible Interventions

The FCA is considering several interventions within its regulatory scope:

  1. Enhanced Information Disclosure: Increasing transparency about insurance policies to leaseholders to enable them to challenge unfair costs.
  2. Extension of Regulatory Protections: Adjusting the regulatory framework to extend more protections to leaseholders, possibly redefining them as customers of the insurers.
  3. Commission Structures: Exploring the limitation of commissions paid to brokers and other parties to ensure they do not incentivise practices that disadvantage leaseholders.

Current Progress and Next Steps

The FCA has begun analysing the first set of data collected and will continue with further data analysis and industry engagement. The authority is working to produce a final report within a six-month timeframe as requested. The initial findings and ongoing analysis will guide the development of effective market interventions.

Conclusion and Future Engagement

The FCA acknowledges the complexity of this issue, involving multiple stakeholders including government bodies, industry groups, and regulatory agencies. It commits to continuing its engagement with these parties to explore all possible solutions, including those that may involve government intervention.

Key Takeaways and Actions for Affected Parties

The ongoing FCA review is critical in ensuring that the insurance market operates fairly and transparently, with a strong focus on protecting the interests of leaseholders in multi-occupancy buildings. Further updates will provide more detailed guidance and potential regulatory changes aimed at addressing the identified harms.

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