Following a period of consultation, the Financial Conduct Authority’s (FCA) new regulations in respect of Multiple-Occupancy Building Insurance (MOBI) came into force at the start of 2024.
But what do they mean for intermediaries and those policies that are in scope of these new rules?
Why the need for new rules?
Following the terrible events at Grenfell in 2017, concern was rightly raised as to the worrying and significant increases in premiums being charged on some multiple-occupancy buildings, particularly those with combustible cladding who were seeing high year on year premium increases.
In 2022, an FCA report highlighted concerns that residential leaseholders were experiencing poor outcomes and increased costs in respect of the property’s insurance arrangements.
Whie the cost of arranging this insurance is typically passed onto leaseholders, under the old rules leaseholders actually received very little protection in return.
The FCA, in partnership with the Department for Levelling Up, Housing and Communities, identified:
• A lack of transparency and disclosure, making it difficult for leaseholders to understand or challenge the level of these insurance costs;
• That residential leaseholders were not classed as customers, meaning that whilst the interests of the property owner were taken into account when designing and distributing policies, the interests of leaseholders weren’t always considered in equal proportion; and
• Commissions and fees earned by everyone in the insurance chain (including potentially the property’s managing agent) were often disproportionate to the work involved, and further that remuneration practices in general caused concern.
In bringing the new rules into force, the FCA aims to ensure that the interests of residential leaseholders are considered in policy design, that policies represent fair value, and that leaseholders have sufficient information to understand and challenge MOBI costs passed onto them. Importantly leaseholders are being treated like customers as they have a material interest in the subject matter of the policy.
It is important to note that the new rules apply to buildings insurance for any UK property with more than one occupant where any part of the property is leased to a residential leaseholder who contributes towards the insurance cost. This means that the rules apply more broadly than blocks of flats. The rules do not apply to properties which are 100% commercial leases or to rented properties where leaseholders or tenants do not contribute towards the insurance, for instance a single property buy to let under an Assured Shorthold Tenancy (or PRT in Scotland) to a single person or family is not within these rules where the tenant does not expressly pay towards the insurance.
What do intermediaries need to do to comply with the MOBI rules?
The new rules apply irrespective of the firm’s part in arranging the insurance, so apply to the insurer, the broker arranging the policy, the firm advising the client and the Managing Agent if they are involved in the insurance process. Some aspects apply to the firm advising the client, such as providing information in the required format to pass onto each residential leaseholder, but everyone in the chain has certain responsibilities depending on their duties, including ensuring a fair outcome for all of the clients (the freeholder and leaseholder).
Ahead of policy renewals it is incumbent upon intermediaries to establish whether; a) the policy is in scope, i.e., is there at least one residential leaseholder who contributes towards the insurance premium; and b) if so, whether it will be arranged via a Property Management Agent (“PMA”) or direct with the client (i.e. the freeholder).
If the policy is in scope, there are three key areas for intermediaries to consider:
- Improved disclosure for leaseholders
Obtain the correct information from your insurance provider and make it clear that this is passed on to the residential leaseholder by the policyholder promptly after the conclusion of the contract. Information should include, as a minimum, a summary of cover; remuneration information for everyone in the chain (including if you make a payment to a PMA); and demonstration of fair value processes. i.e. identifying how many quotes were obtained. - Product governance
Under the new rules leaseholders are being treated as customers and therefore should be afforded the same considerations as the policyholders themselves. As intermediaries you must demonstrate that their needs and requirements have been met in the design, pricing, and distribution of MOBI products, and that they consistently demonstrate fair value i.e. that there is an equitable balance between policy cost and quality. - Remuneration
Under the new rules you must crucially ensure that your remuneration practices do not conflict with the residential leaseholders’ best interest, as well as your obligations under the Consumer Duty to act honestly, fairly, and professionally.
Need help?
Make sure you work with a general insurance provider that is expert in placing insurance for multiple-occupancy dwellings. Not only should they be able to assist you in complying with the new rules, but they can take away much of the administrative burden by following the right processes and preparing the right documentation for your client and their leaseholders.
Geoff Hall is chairman at Berkeley Alexander
