Following the King’s Speech, you may be aware that the Financial Conduct Authority (FCA) has recently published changes to rules relating to insurance for multi-occupancy buildings. This follows reports that raised concerns about the insurance market and highlighted the risk of poor outcomes for leaseholders. Furthermore, the Department for Levelling Up, Housing and Communities (DLUHC) has indicated that they intend to take further action, including banning commissions for certain parties.

Who is affected?

• Directly authorised by the FCA
• Appointed Representatives
• Exempt Professional Firms (such as RICS Insuance Authorised
• Introducers and Introducer Appointed Representatives (IARs)
• Freeholders, arranging insurance, and charging their leaseholders
• Residents’ Management Companies (RMC) or Right to Manage (RTM) arrangements
• Other unauthorised firms arranging policies or collecting premiums

When do these new rules come into effect?

The new rules apply to policies renewing or incepting on or after 31st December 2023. This is one of the shortest implementation periods set by the FCA, who considered it important to have the new rules in force from the beginning of 2024, when many multi-occupancy building insurance contracts will be renewed.

Why are the FCA making these changes?

Residential leaseholders ultimately pay for and have an interest in the insurance policy. Under previous rules, they had limited rights to information about the policy they were funding. At the same time, concerns have been raised. about commission sharing and whether such payments are proportionate to any work being done.

The new rules are designed to give leaseholders rights similar to those of policyholders and to receive information about the cover being arranged and for which they have to pay. This is not about collective decision-making, but to ensure transparency and empower leaseholders to protect their interests through existing channels.

What are the new rules?

The FCA has announced a number of reforms, with the key areas being:

Disclosure and Fair Value: Disclosure firms will be required to disclose key information about the product and their services in the new disclosure documents, which will include information on:

• Summary of the features of the policy, including the main benefits, coverage, and exclusions of the policy, its duration, and the insured sum.
• Clear pricing information, including the premium and relevant tax.
• Total remuneration received for arranging the insurance, including commission paid by insurers.
• Remuneration paid to other parties, including unregulated Property Managing Agents (PMAs) and freeholders, will need to be included.
• Any ownership links between the intermediary and any insurers and about the insurers with whom the insurance is placed.
• The number of alternative quotes that have been obtained.
• A brief explanation as to why the proposed policy is right for both the client and leaseholders.

Disclosure is proactive, and the above information will be provided promptly after the conclusion of the contract to all leaseholders.

Alexander Bonhill will ensure that the disclosure letter for all clients is made available as soon as possible after the inception of the policy.

Leaseholders are usually not involved in setting up the insurance policy. They also may not have a direct client relationship with an insurer or broker. By reason of this, they have not had the same rights as ‘customers’ or ‘policyholders’. Under the new rules, regulated firms will be required to:

• Act honestly, fairly, and professionally in accordance with the best interests of the leaseholder and client.
• Consider leaseholders as a relevant part of the target market when designing, pricing, and distributing their products.
• Demonstrate that products provide fair value to leaseholders. This means that there must be a fair relationship between the total price and the overall benefits the leaseholder receives.

Firms will need to consider the amount of all forms of remuneration, including financial incentives, they share with other parties in the distribution chain, such as freeholders and PMAs. Such payments will not be allowed where firms cannot demonstrate that they represent fair value to leaseholders. As a result of these rules, intermediaries that receive percentage-based commissions will need to assess the commission received by all parties against

the work undertaken by each and evaluate whether the outcome reflects fair value, both for policyholders and leaseholders. In this regard, it should be noted that Alexander Bonhill does not pay commissions to any third parties.

In conclusion, the FCA’s reform on multi-occupancy buildings insurance have introduced a new era of transparency and accountability to ensure leaseholders interest are best served throughout the insurance process.