Insurance brokers body launches ‘Fair Value Framework’ amid FCA criticism

Developed in collaboration with Oxera, an economics and finance consultancy, the Fair Value Assessment Framework has been made available to BIBA members via the association's website.

Participation in the framework is voluntary and is intended to help insurance brokers to implement or refine their fair value models in a way that suits their customers’ needs.

Matt Saward, financial regulation expert at Pinsent Masons, noted that the framework was developed after the Financial Conduct Authority’s (FCA) identified a number of issues in the multi-occupancy buildings (MOB) insurance sector and in other situations where people pay for insurance cover, but are not afforded any rights under the policies.

FCA reports published in September 2022 and April 2023 found that, while leaseholders are required to pay insurance charges, they have no say in choosing policies or prices. They are not considered ‘customers’ by insurers or brokers, meaning there is no regulatory requirement to consider their interests.

The reports also found that a lack of transparency made it difficult for leaseholders to challenge whether costs are reasonable, and allowed companies to hide bad practices. Some payment practices in the market, including brokers receiving unjustifiably high commissions, were also flagged by the regulator as failing to provide fair value.

In response, the FCA proposed new rules (52 pages / 673KB PDF) ensuring that leaseholders, and certain other individuals who pay for insurance cover, but are not afforded any rights under policies, are afforded certain regulatory protections as if they were ‘customers’. The proposals also include new disclosure requirements for brokers aimed at providing key information to leaseholders.

Saward said: “Certain remuneration practices in the multi-occupancy building insurance sector, among certain others, have long been an issue that legal and compliance teams at insurers and intermediaries have had to wrestle with, particularly in light of the FCA’s recent thematic work on fair value.”

“The new rules introduce significant changes which will place more onerous obligations on manufacturers and distributors of MOB insurance including on product design and development, remuneration and disclosure. With the rules coming into force on 31 December 2023, there is limited time to implement these changes. As such, the BIBA guidance is likely to be welcomed by members who are able to utilise this, Saward said.

He added: “Insurers and intermediaries should carefully review the new rules and determine the extent to which they are impacted, noting in particular that certain of new rules relating to the new concept of a “policy stakeholder” are not limited to MOB insurance, but may apply to non-investment insurance contracts more widely.