FCA seeks input into rules applicable to commercial insurance firms

The consultation - Regulation of Commercial and Bespoke Insurance Businesses (37 pages / 832 KB) – sets out to better address this balance, considering three changes to the way certain FCA rules apply to commercial insurance firms.

First, the consultation considers how the FCA distinguishes between insurance for consumers, under the Insurance Conduct of Business Sourcebook (ICOBS), and for commercial customers, through the contract of large risks definition. The FCA notes its handbook does not have a consistent definition to distinguish between small and medium entities (SMEs) and larger commercial customers. The consultation examines whether the contract of large risks definition is fit for purpose and proposes broadening the scope of what would be considered a ‘commercial customer’ for rules relating to Consumer Duty, ICOBS, and the Product Intervention and Product Governance Sourcebook (PROD). The idea here would be to increase time and resource-efficiency when insurance firms categorise customers for onboarding or renewal.

The second proposed change considers how the rules apply where more than one firm is responsible for manufacturing insurance products. The consultation proposes simplifying the application of the PROD rules to co-manufacturers of insurance products to avoid duplication of manufacturing processes and obligations and to ensure consistent approaches.

The consultation also addresses the challenges around how the PROD rules apply to bespoke insurance products by providing clarity on what products should be considered bespoke. The consultation proposes broadening the definition of a ‘bespoke product’ allowing for an expansion of the current bespoke contract exclusion under PROD. The FCA is considering whether the bespoke contract exclusion should apply to both intermediary co-manufacturers and insurers, rather than just co-manufacturers, for bespoke insurance contracts for a single customer.

“The consultation demonstrates that the FCA is considering areas where it may be appropriate to reduce the regulatory requirements and potentially costs on firms, while maintaining appropriate levels of protection for SME commercial customers”, said Matt Saward, insurance regulatory specialist at Pinsent Masons.

Saward said: “In recent years commercial insurance firms, both intermediaries and underwriters, have had to implement a significant amount of financial services consumer protection regulation which, in certain cases, may have felt disproportionate to, or inappropriate for, the nature of certain of their insurance business. It is likely that the industry will very much welcome the steps taken by the FCA to address these issues and to seek to provide greater clarity on the application of its rules in relation to commercial customers, particularly the consumer duty and product governance rules.”

The consultation is open for responses until 16 September.

Saward said: “We would strongly encourage firms who have encountered complications in implementing these regulations across their businesses to engage with this consultation and it is positive to see that the FCA appears to be taking meaningful steps to further its secondary objective on international competitiveness and growth.”