What do landlords and tenants need to know about insurance for multi-occupancy buildings in the wake of the Grenfell Tragedy?

One of the many ongoing impacts of the Grenfell Tower disaster, is that it has led insurance premiums for multi-occupancy buildings to increase significantly.

The Financial Conduct Authority (FCA) therefore published a report setting out its recommended measures to increase the availability and affordability of insurance for multi-occupancy buildings.

The report highlights a number of key issues including the practice of insurance firms sharing commissions with managing agents and freeholders.

A full copy of the report is available here.

What happened after the FCA’s report on insurance for multi-occupancy buildings?

In response to the FCA report (in January 2023) Michael Gove, Secretary of State for Levelling Up, Housing and Communities, published a letter expressing concern about the lack of regulatory protections for leaseholders. He made it clear that widely available and affordable buildings insurance is one of his “top priorities”.

His letter therefore asked the FCA to:

• Present its implementation plan for reforms by summer 2023
• Investigate higher broker commissions by March 2023. Then meet with the Building Safety Minister to confirm what actions it will take
• Continue pressing the industry with regard to the industry-led scheme to lower the highest premiums for buildings with significant fire safety issues. The scheme to be implemented before summer 2023
• To deliver a new code for fire safety risk information to improve data collection with the Association of British Insurers (ABI) and British Insurance Brokers Association (BIBA) by the end of February 2023. This will be key to assessing market trends in order to address the issues highlighted by the report.

The letter concluded by making it clear that he will “take action to ban managing agents, landlords and freeholders from taking commission and other payments when they take out buildings insurance, replacing such payments with more transparent fees”.

A full copy of Michael Gove’s letter is available here.

What happened in response to Michael Gove’s letter?

• On 28 February 2023 the ABI and BIBA launched a code on core risk data for multi-occupancy buildings over 4 storeys or 11 metres in height affected by combustible cladding or other material fire risk issues. This is necessary in order to understand key market trends
• The FCA published a review (April 2023) of its multi-occupancy buildings insurance broker remuneration.

The review highlights a number of key concerns including:

• Levels of remuneration have risen by nearly 40% between 2019 and 2022, despite reductions in commission percentages
• Most of the brokers in the FCA’s sample did not provide adequate evidence to show that they deliver fair value consistently for multi-occupancy buildings products
• Although the brokers appeared to meet their basic Insurance Conduct of Business Sourcebook disclosure obligations, the quality of the disclosure varied widely.

The FCA is clear that more work needs to be done to ensure fair value is consistently delivered. They confirmed that the issues highlighted in the report emphasised the need for the interventions set out in their initial report.

What are the four key changes the FCA wants to achieve in multi-occupancy buildings’ insurance?

1. The interests of leaseholders are properly considered when firms design their products
2. Prices are fair value to leaseholders and freeholders
3. Remuneration of all parties involved in insurance distribution has a fair relationship to the benefits provided to leaseholders
4. Leaseholders have sufficient information to challenge poor practices and unfair costs passed on to them.

A full copy of the review is available here.

The FCA also published a consultation paper alongside its review, a copy of which is available here. The consultation closed on 9 June 2023 and sought views on the FCA’s proposed rule changes. Their proposals are wide-ranging and include additional disclosure rules to provide greater transparency for leaseholders including:

• Clear pricing information for leaseholders to understand how the policy premium is made up
• Intermediaries to disclose the total remuneration received for arranging the insurance
• Intermediaries to disclose the number of alternative quotes they have obtained.

What is next for landlords and tenants when it comes to insurance of multi-occupancy buildings?

It is clear from the FCA Report, Michael Gove’s letters and subsequent reviews, that more needs to be done to protect some leaseholders and to increase the availability and affordability of building insurance cover for multi-occupancy buildings. The proposed actions and assurances given by the FCA and Michael Gove show that they are committed to making improvements. However, we await the implementation of their proposed reforms in order to fully assess the impact they will have on the multi-occupancy buildings insurance market.