How do the new FCA rules on multi-occupancy buildings insurance impact flexible benefit schemes?

This guidance is intended as a briefing on AIG Life’s approach, for advisers and employee benefit consultancies.

I am going to put it out there; multi-occupancy buildings insurance is not a topic that I, or we at AIG Life know all that well. We provide protection products after all. However, a recent FCA ruling on this topic has knock-on effects for flexible benefit schemes – all insurers, advisers and employers should take note.

What’s this all about?

In April 2023, the FCA started a consultation to look into concerns about how multi-occupancy building insurance works for leaseholders. In this scenario leaseholders aren’t the policyholder, the freeholder is the policyholder. Yet they’re expected to pay the premium for their dwelling, usually a flat or apartment and benefit from the policy should it pay out. However, leaseholders have no control over the premium, no ability to shop around and often no real understanding of what’s covered.

Following the consultation, the FCA issued its response and final rules in September 2023 in paper PS23/14. The FCA say the new rules will ensure better outcomes for leaseholders and other ‘policy stakeholders’ by:

• "Increasing transparency for leaseholders. This’ll make it easier for them to identify and challenge poor practices and incentivising 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 defining ‘policy stakeholders’ the rules also consider other similar scenarios:

"In addition to the specific rules relating to leaseholders in multi-occupancy buildings, we also proposed to apply some of the rules to other similar situations where a person both has:

• a contractual or statutory obligation to pay for a part or all of the insurance premium
• where the obligation arises in relation to the person having an interest and/or benefit in the subject matter of the insurance. We referred to these people as policy stakeholders."

The FCA provide examples of ‘policy stakeholders’ to include, in relation to flexible benefits:

“Those paying for travel insurance or income protection through salary sacrifice schemes may already be classed as customers within our rules (e.g. if they are group policyholders). However, if they are not, we expect they would meet the definition of being policy stakeholders. This is because they are paying an amount for the insurance and clearly have an interest in the subject matter of the policy”

The rules came into effect on 31st December 2023.

What does this mean?

In our view, the disclosure rules also apply to employees who opt in to flexible and voluntary benefit schemes. Where they choose to increase/decrease their level of cover, or opt in in the first place, and pay their own premium for this voluntary element via salary sacrifice.

This means that group protection insurers and likely the insurers of other products where the same circumstances exist, and advisers need to start disclosing new information to employees who are part of these schemes. ?

Under the rules, the following information must be disclosed to employees:

1.??? A summary of the features of the policy, including main benefits, coverage and exclusions of the policy, duration and insured sum

2.??? The policy premium, as it relates to the individual requiring cover (their own premium)

3.??? The remuneration which any authorised intermediaries received for arranging the insurance, as well as remuneration they pay to other parties

4.??? Information about potential conflicts of interests, such as ownership links between the intermediary and the insurer, and about the insurers with whom the intermediary may place the policy

5.??? The number of alternative quotes they’ve got (with further details of these to be provided on request) and a brief explanation of why they’ve proposed or recommended that the policy is in the interests of both the employer and employees.

The rules state “Responsibility for producing the information would be split between the insurer and intermediary. The insurer would be responsible for providing the policy summary and pricing information. The intermediary would be responsible for producing remuneration, conflicts or interests and placing and history information. The firm who’s in contact with the customer would be responsible for providing the information to them. “

“As leaseholders are typically not the contractual ‘customer’ of the insurer or intermediary, we proposed that the information should be provided by the insurer or intermediary contractual customer with a clear instruction that it should be passed on to leaseholders.”

We’re updating our policy literature for employees to cover point one. Our quotes already include pricing information and employees should be aware of the price to select the right benefit, this covers point two. Points three to five will need to be produced by the adviser.

Normally we don’t have direct contact with policyholders and so an adviser would be responsible for sharing the above documents, including points one and two, with the policyholder. Plus the policy literature for employees which we also publish on our website. If a policyholder doesn’t have an adviser, then we can send the information to them. But whoever contacts the policyholder must make it clear the information needs to be passed onto employees.

The format of the disclosure is not specified, but our suggestion is that advisers provide a statement to include points three to five, along with the policy literature for employees (point one), so employers can pass this package of information on as soon as possible after an employee has chosen their cover (the conclusion of the contract). This could perhaps be done within the online benefits system itself, or as a separate communication.

We’re adjusting the terms and conditions of our policy to remind advisers and employers of these new disclosure standards. There are also other requirements on us to consider the needs of ‘policy stakeholders’ in our product governance arrangements and we’re working on updating these.

What’s the impact on adviser remuneration?

The FCA have said they expect the rules to impact current remuneration practices.

“We expect firms to ensure commission based on percentage rates is consistent with providing fair value to leaseholders. Intermediaries should not earn more in absolute amounts unless there is a corresponding increase in benefits provided to leaseholders.”

Our interpretation is that the FCA are concerned about high commission rates, agreed between insurer, adviser and policyholder, but which is paid for by the ‘policy stakeholder’ who has no say in this.

Normally we don’t limit or cap commission rates as these are fully disclosed on all policy documentation and therefore are agreed between adviser and policyholder. However, in this instance they’re not agreed by employees so we’ve decided to take a different approach. We’ll cap commission to a maximum of 30% of the policy premium for any flexible benefit scheme with an employee paid element.

As financial advice is needed to establish the policy and ensure best possible value for employees, including commission within the premium is still appropriate as employees receive the benefit of this advice. While there’s no obligation, we expect some employers might want to pay for the advice themselves, normally by a fee agreed with the adviser, rather than pass the burden to employees. This’ll lower the cost for employees, which no doubt they’ll welcome.

Summary

These new rules are already in effect. In our view they impact flexible benefit group protection schemes. We encourage advisers to review the new rules and take action to make sure employees are given the right information so they can make informed, considered flexible benefit choices.