Multi-Occupancy Building insurance

On 31 December 2023, the Financial Conduct Authority (FCA) implemented the Multi-Occupancy Building Insurance Policy Statement (PS23/14). Following a series of reviews the UK’s financial regulator the Financial Conduct Authority identified issues in the multi occupancy building insurance market which are leading to poor outcomes for leaseholders

The FCA’s review of the multi occupancy buildings insurance market found that insurance premiums had risen significantly since the 2017 Grenfell tower tragedy in which 72 people were killed in a huge fire in a high rise block of flats in North Kensington London. Leaseholders have therefore been subjected to higher payments to cover these increased insurance costs.

Leaseholders (tenants living in a block of flats) are often bound under their lease to pay insurance charges. however they have no influence over policy selection or price as they are not direct customers of the insurer or the intermediary.

Whilst leaseholders are policy stakeholders they are not the direct customer of the insurer or broker as such there was a loophole in that firms are not obliged to consider the best interests of the leaseholders.

Loopholes within the rules allowed for harmful practises that led to considerable distress for leaseholders financially and emotionally.  Harm resulted as leaseholders found it difficult to challenge costs. The system allowed firms to hide poor practices including remuneration practices that did not deliver fair value.

Remuneration in the distribution of insurance typically involves Commission being paid from the premium. In some cases Commission of up to 62% was being paid to brokers which were difficult to justify. In certain cases Commission was shared with the freeholders and the property managing agents. (PMA’s).

The Multi Occupancy Building Insurance Reforms

Based on the issues identified in its reports of 2022 and 2023 the FCA proposed several reforms to remedy concerns relating to transparency, product design and remuneration practises. These rules are in place from the 31st of December 2023

• Insurance firms must act in the leaseholders best interest effectively treating a leaseholder as if they were a customer when designing products
• Firms cannot recommend insurance policies based on Commission remuneration levels
• The FCA expects insurance brokers to immediately stop paying commissions to third parties including property managing agents and freeholders where they do not have an appropriate justification for doing so.
• Insurers need to ensure that policies provide fair value to the leaseholders
• Firms must also provide important information about policies and pricing including details of any Commission paid for leaseholders

Enhanced consumer protection and competition

The rules require firms to act honestly fairly and professionally in best interests of leaseholders and others in a similar position. The anticipated outcome of these reforms is enhanced consumer protection and competition while the primary focus of the new rules is on consumer protection the disclosure requirements simplify leaseholders understanding of insurance costs passed onto them empowering them to question and comprehend these expenses. This is anticipated to stimulate heightened competition encouraging firms to compete compete with better value products offering competitive premiums and fair remuneration

What information must be disclosed

As soon as practicable after the conclusion of a multi occupancy building insurance contract and upon any subsequent renewal a firm must provide the customer with the following information

• summary of the cover
• pricing information
• remuneration information
• placing and shopping around information
• conflicts of interest information

To whom must disclosure be made

Leaseholders are defined by the FCA as “any natural persons who are policy stakeholders or policy holders or acting outside of their trade or profession and who are liable to pay service charges in relation to tenancies for dwellings in line with the landlord and tenant act 1985 and where relevant are recognised tenants association”.

Summary of cover

• The summary of cover must include where applicable the following
• The name of the insurance undertaking an its regulatory status
• Type of insurance
• Main risks insured
• Summary of excluded risks
• The sum insured together with in the case of the flats the amount from which the building containing it is insured under the policy an if specified in the policy the amount for which the flat is insured under it and in the case of a dwelling other than a flat the amount for which the dwelling is insured under the policy
• Pricing information – the pricing information must set out the total premium for the policy an include the amount of insurance premium tax, the amount of VAT and a breakdown of the premium at building level and where relevant flat or dwelling level

Remuneration information

The remuneration information must include:

• the total Commission that the firm and any associate receives.
• any remuneration or other financial incentive offered or given by the firm to any third party including the freeholder or anyone acting on behalf in particular where the firm knows or should be reasonably aware that the sum will be included in the amount a leaseholder would be liable to pay in connection with the multi occupancy building insurance contract.

The information provided should be actual cash amounts and if needed it can be estimated. The disclosure needs to encompass every type of payment or financial reward that the company, its affiliates or any third party mark receiving connection with the multi occupancy building insurance contract. This applies both before and after policy is finalised it covers various scenarios such as profit sharing agreements or compensation linked to future events like payments dependent on specific targets being achieved.

Placement and shopping around information

1. The information required must include the insurance undertaking with which the multi occupancy building insurance was taken out and any other insurance undertaking
2. An explanation of why the particular multi occupancy building insurance contract taken out was consistent with the interest of both customer and the leaseholder

If a customer or leaseholder requests them firms must give more details about the insurance quotes they obtained. The explanation will depend on whether the company gave a personal recommendation for the policy. If there was a recommendation the explanation should explain why that specific policy was considered right for the customer considering things like coverage cost exclusions and other terms. But even if the policy wasn’t chosen based on advice the explanation should provide enough information for the customer and leaseholder to understand why that policy was selected.

If you are looking for an alternative quotation for your multi occupancy building insurance please call Cornerstone on 0116 3440040.