Context
The FCA has published a page on its website outlining its expectations of regulated firms when arranging and providing fair value buildings insurance for leasehold apartment buildings. The Regulator explains that, in recent years, the cost of buildings insurance has increased significantly for some apartment buildings, especially if the building’s exterior is clad with potentially combustible materials. This has led to a rise in charges for some leaseholders.
This is a low-key publication which is fairly brief (so not a press release, Dear CEO Letter, consultation paper or policy statement) and is perhaps positioned more as a reminder and an indication of regulatory scrutiny which could be much more significant than the number of words used might indicate.
The message is to take leaseholders’ interests into account when considering the value of the policy, including the remuneration of the various parties in the distribution chain.
Leaseholders will not, generally, be the client or customer of the broker; they may well be ‘policyholders’ (i.e., able to make a direct claim on the policy) but they will generally not be the customer. Almost invariably, though, the leaseholders will pay for the cost of the insurance in some way.
There is perhaps an inherent conflict of interest for the property managing agent/landlord. The leaseholder/tenant has been in a weak position as the insurers and brokers consider the property managing agent/landlord as the insured or the client, meaning the leaseholder/tenant could not benefit from FCA rules designed to protect the “customer”.
In view of the significant increases in premiums for blocks of flats, most people would see it as unpalatable if property managing agents were still getting their high rates of commission on the increased premiums and passing this cost onto leaseholders and tenants.
Key points to note
- Although this is mainly in response to the post-Grenfell cladding crisis whereby insurance premiums have increased dramatically for affected properties (Cladding scandal: buildings insurance premiums soar – Which? News), the FCA has also used this to address a long running issue whereby the property managing agent/landlord arranges the insurance, takes a commission and passes the cost onto the leaseholder/tenant.
- This topic gets attention from the media and politicians and the FCA has met MPs in relation to this topic in the past. (See Leaseholders pay up to 60% more for buildings insurance because of secret commissions, reports The Times – Leasehold Knowledge Partnership).
- The FCA has made the link with ‘fair value’; insurers and insurance intermediaries should consider the value of these insurance products for customers (including any policyholders who could bring a claim under the policy).
- The FCA has cited the ‘customer’s best interests’ rule in setting out its expectations of firms arranging buildings insurance.
- The FCA is clearly seeking to stretch what it sees as the ‘customer’ and is perhaps using the best interests rule and the product value rules to make sure that the leaseholders and tenants are also being treated fairly.
- The FCA also highlights wider legal obligations under landlord and tenant legislation.
- “Product value” is becoming the FCA’s main tool in regulating the general insurance industry; “We have identified that the most significant risk of potential and actual harm in the portfolio is through customers buying unsuitable or poor value products.” (the portfolio letter for the Personal and Commercial Lines Insurance Intermediaries issued in September 2020).
- In a recent speech the FCA’s Chief Economist described product value as the major topic, and that the pricing practices work is a subset of the product value work.
- The pricing practices Policy Statement is due out perhaps by the end of the month, with any new rules on product governance/product value due to be implemented by the end of September 2021 and the balance of the new requirements coming into effect by the end of the year.
Next actions
Firms involved in the distribution of buildings insurances to the property management sector/landlords should consider the potential implications of the FCA’s words, and the fact that the regulator is making links to product value (including value in the distribution chain), product pricing and customers’ best interests.