The FCA rule changes outlined in PS23/14 will do this by:

• Increasing transparency for leaseholders. This will make it easier to identify and challenge poor practices and incentivise firms to deliver better outcomes.
• Requiring firms to ensure their products are consistent with the needs and interests of leaseholders and other policy stakeholders, are priced in a way that provides fair value and that remuneration practices do not lead to poor outcomes.

In addition, the Department for Levelling Up, Housing and Communities (DLUHC) is determined to introduce legislation to ban commission sharing for multi-occupancy buildings insurance. DLUHC has also announced their intention to improve service charge transparency to make it harder for landlords to hide unreasonable and unfair costs.

This should help remove barriers so leaseholders can challenge their landlord if their service charge is unreasonable by ensuring they do not face unjustified legal costs and, where appropriate, having the ability to claim their own legal costs from the landlord.

Frequently Asked Questions

Q. What FCA rules are changing?

• Product Intervention and Product Governance Sourcebook (PROD)
• Leaseholders will become policy stakeholders and should have their interests considered.
• Product manufacturers (usually insurers) will need to consider leaseholders as part of the target market when designing, pricing, and distributing their products. Changes to PROD rules will require firms to consider the interests of both freeholder and leaseholder equally.
• Firms will need to demonstrate fair value to leaseholders as well as any other customer. This means a fair relationship between the total price and the overall benefits leaseholders receive.
• Firms will also need to consider the amount of remuneration they share with other parties on the distribution chain, such as freeholders or property managing agents. FCA rules would not permit payments unless they provided fair value to leaseholders.

2. Insurance Conduct of Business Sourcebook (ICOBS)

The FCA will be applying the ICOBS customers’ best interests rule for the benefit of policy stakeholders. This requires firms to act honestly, fairly, and professionally in accordance with the best interests of leaseholders. The FCA accepts that the interests of freeholders and leaseholders may not fully align, but all have a clear interest in ensuring their properties have the right cover at a fair price. Firms are already required to manage these conflicts under existing rules.

3. Systems and Controls (SYSC)

Including leaseholders as policy stakeholders also applies to SYSC 19F.2. This requires firms to ensure remuneration practices do not conflict with ICOBS customers’ best interest’s rule. SYSC: New guidance for insurance distributors (usually brokers):

1. Firms must consider all the remuneration they receive, whether they are wholly retained or make payments to another party, such as a freeholder or a property managing agent.
2. Firms must ensure the remuneration they pay to another person is consistent with the best interests of customers, including policy stakeholders.

When firms identify their remuneration practices, whether in relation to amounts or incentives to others, they must align with all customers, including leaseholder interest or make the appropriate changes.

Q. How do the new rules define the term leaseholder?

A. 1. A policy stakeholder or a policyholder (who is a natural person acting for purposes that are outside their trade or profession), who is:

a) A tenant within the meaning of Section 30 of the Landlord and Tenant Act 1985; and

b) Liable to pay a service charge as defined in Section 18 of the landlord and Tenant Act 1985; and

2. (Where relevant) a recognised tenants’ association within the meaning of Section 29 of the Landlord and Tenant Act 1985.2

Q. How do the new rules define a policy stakeholder?

A. A natural person (excluding a policyholder) who is under a contractual or statutory obligation, which does not arise solely from that person’s trade or profession, to pay an amount:

1. Relating to:

a) The premium; and

b) Any other costs connected to the distribution of a non-investment insurance contract; and

2. Where the obligation arises in relation to the person having an interest in and/or benefit in the subject matter of the insurance.

Q. Will sub-tenants and tenants with assured short-hold tenancies (AST’s) be included as stakeholders?

A. No, the FCA does not expect that sub-tenants or those with assured short-hold tenancies (AST’s) will be either leaseholders or policy stakeholders. This is because tenants in these cases do not typically have a specific contractual obligation to pay an amount relating to the insurance premium for buildings cover. Instead, they would pay a general rent, some of which may be indirectly used by their landlord to fund the insurance.

Q. Will this include commercial tenants?

A. No, the FCA has been very specific by clarifying the ‘leaseholder’ definition to set out more clearly that it covers residential leaseholders. This means that the disclosure rules only apply to multi-occupancy building insurance policies for residential leaseholders. Firms will not need to provide disclosures intended for commercial leaseholders.

Q. What information will need to be disclosed to leaseholders?

A. Brokers will need to disclose key information about the product and services provided. The disclosure would include:

• A summary of the features of the policy, including the main benefits, coverage and exclusions of the policy, duration, and insured sum.
• The policy premium. Where the policy covers a portfolio of buildings, firms must disclose the premium at the building or dwelling level. To avoid creating significant additional work and cost to firms, the rules will allow the building (or dwelling) level breakdown of the premium to be estimated where necessary and the figure being provided is reasonable.
• The remuneration received in relation to the multi-occupancy building insurance contract in question. This includes remuneration such as contingent commissions or profit shares, which may only be earned or paid after the contract is concluded. Brokers should also disclose the remuneration we pay to other parties, including unregulated PMAs and freeholders.
• Information about potential conflicts of interest, such as ownership links between the intermediary and the insurer, and about the insurers with whom the
• The number of alternative quotes they have obtained (with further details of these provided on request) and a brief explanation of why they have proposed or recommended that the policy is in the interests of both the freeholder and leaseholders.

• Q. When will this information be shared with the leaseholder?

  A. The information must be disclosed as soon as reasonably practicable after the conclusion of the contract. The FCA has confirmed that although leaseholders may want to have information as early as possible, providing information before a conclusion would not produce any benefits compared to providing it after. Leaseholders are generally only able to challenge insurance costs once charged to them by the freeholder. Providing information earlier could increase costs, which would be borne by the leaseholders.

  Q. Will commission sharing be banned, and when will this happen?

  A. We expect a ban on sharing remuneration with property managing agents, freeholders and landlords to happen in the very near future. We expect that banning commission sharing will form part of the leasehold reforms included in the King’s Speech this autumn. The FCA has indicated they will fully support this move.

  Q. Why are commission pay-aways under scrutiny?

  A. DLUHC first raised concerns in January 2022 following the Grenfell tragedy and the subsequent inquiry. Commission levels and the distribution of commission to third parties were considered to add extra cost and burden to leaseholders, who usually pay the premium via service charge contribution.

  Q. Will freeholders and property managing agents be able to charge a fee for insurance services provided as part of the distribution chain when placing building insurance?

  A. It is not clear yet as to what the legislation will include, but we believe that a transparent form of fee may be permitted.