In December 2023, the Financial Conduct Authority (FCA) set out new rules for multi-occupancy building insurance. These rules only apply to residential leaseholders. They do not affect commercial properties.
In this post we will review the new rules that came into play and assess the effect these new rules have had on the market over the past year.
Why Were New Rules For Multi-Occupancy Buildings Insurance Introduced in 2023?
The FCA’s new rules were devised in response to certain concerns that surrounded insurance for high-rise buildings following the 2017 Grenfell Tower fire. It was found that the insurance market was not working in the interests of leaseholders.
On buildings insurance policies for multi-occupancy properties, the freeholders are the insured party, rather than the leaseholders. As a result, insurers and brokers rarely considered leaseholders’ needs. On top of this, leaseholders did not have a say in how their cover was arranged, and they had no means of challenging any decisions made about their cover.
The FCA established new rules to apply to all leasing contracts completed from 31 December 2023, including renewals. The new rules apply to the building insurance policies for any leasehold dwelling in the UK, of any size and of any type. Specifically, the changes are intended to benefit leaseholders who pay a “service charge” as part of their lease, which contributes to building insurance cover.
The only instances where these rules do not apply are in commercial properties leased by businesses, and in rented accommodation where there is no itemised cost for insurance.
The FCA’s NEW Rules For Multi-Occupancy Building Insurance
The new FCA rules are as follows:
New Disclosure Documents
There must be more transparency over any decisions made about a building insurance policy by freeholders. Plus, new disclosure documents are now necessary to make it clear to leaseholders exactly what they are getting for their insurance premiums.
The FCA stipulate that these documents must be designed with a consumer audience in mind, meaning that they must be more accessible and not contain overly technical language.
Insurers and brokers have a responsibility to share these documents with policyholders, who then have an obligation to share them with leaseholders. For more information, you can read a full guide to the content that the FCA outlines for these disclosures.
Leaseholders are Now Considered Customers
As leaseholders are now considered customers in insurance arrangements, insurers and brokers must provide the same level of service and transparency as they would to any other customers.
This has numerous implications on how insurers and brokers operate. For example, under this new rule, insurers and brokers must ensure that any renumeration decisions are not just in the freeholder’s best interests as a policyholder, but also in the leaseholders’ best interests.
Insurers and Brokers Must Provide Fair Value to Leaseholders
As leaseholders typically pay their own insurance premiums, then insurers and policyholders have an obligation to deliver a valuable product at a fair price, with total transparency on any pricing decisions.
The Effect of the New Rules For Multi-Occupancy Buildings Insurance One Year On
These new rules have been in place for almost a year now. How has it affected the insurance market for multi-occupancy buildings?
The new rules appear to have kickstarted a national conversation about leaseholders’ rights. It has emerged that, in recent years, leaseholders have paid hidden insurance commissions as part of their “service charge”.
Until these new rules came in, leaseholders had no say in the decisions that freeholders made regarding buildings insurance. It has emerged that certain freeholders may have agreed to pay higher premiums for cover, allowing brokers to receive larger service fees. In exchange, freeholders benefited from commissions in exchange for choosing this insurer.
The higher premium payments were passed on to leaseholders, who did not receive any added value. Worse, they often had no idea that such arrangements had taken place, and even if they were made aware, they would have no ability to influence any decisions.
2024 Class Action Lawsuit against Hidden Insurance Commissions
In July 2024, a class action lawsuit was launched against these “hidden insurance commissions”, which one solicitor described as a “national scandal”.
Such secret arrangements and underhand commissions would be in breach of the new FCA rules. The British Insurance Brokers’ Association has welcomed these reforms. They have also announced their plans to produce guidance for brokers to help them ensure that they value leaseholder interests alongside freeholder interests.
Paul Stenning, Divisional Director, Real Estate & Construction, James Hallam, said:
“These new rules should help to level the playing field in an area of insurance that has traditionally been exploited by certain parties. As a prudent specialist broker, we welcome these new rules and have embraced the rationale to ensure that our clients’ insurances are placed with an emphasis on a combination of breadth of cover, security of insurers, and fair and appropriate insurance premiums.
“Our advice to freeholders who may be concerned about their premiums is don’t be afraid to ask your broker or managing agent for disclosure of costs and fees as you are entitled to know exactly what your leaseholders’ premium payments go towards. And of course, don’t forget that you are within your rights to seek alternative quotes.”
Waiting For The Autumn Budget
Since the FCA introduced the new rules, the UK has elected a new Labour government. At the time of writing, the details of Chancellor Rachel Reeves’ Autumn Budget, and the implications it might have on the insurance industry, are unclear. However, there are concerns that the new government may look to raise insurance premium tax (IPT).
Biba has called on the new government to cut the headline rate of IPT from 12% to 10%. On top of this they have called for an IPT exemption for all multi-occupancy residential buildings that are either currently undergoing, or in need of, cladding remediation.
In a statement, Biba said: “We believe that IPT is a tax on the poor and vulnerable, and a tax on businesses at a time when we want them to invest more in risk management.”
Are You Struggling to Get Multi-Occupancy Building Insurance?
There have been concerns that, following these new FCA rules, insurers and brokers may leave the market, or else limit their cover options.
If you are a freeholder, and you have struggled to get multi-occupancy building insurance as a result, we can help you.
We are an independent Lloyd’s broker with a dedicated team of experienced insurance professionals. We are committed to getting you the cover you need at a price you can afford.
Talk to us, and we can help you ensure you have enough cover to protect your multi-occupancy property at a truly competitive price. We will also help you ensure you meet the new FCA regulations, and that your insurance meets your leaseholders needs, as well as your own.
Get in touch for a free quote today.