FCA proposals to simplify insurance rules ‘welcome step’ for businesses and consumers

The consultation, which runs until 2 July, follows on from the publication by the FCA of a discussion paper in July 2024 which questioned whether its rules strike an appropriate balance between safeguarding customers who require regulatory protections and competitiveness in the commercial non-investment general insurance market.

The consultation makes a number of proposals on topics which were the subject of the July 2024 discussion paper. Among them is the FCA’s proposed new definition of ‘contracts of commercial or other risks’ to be used for determining the contracts and customers that fall outside the scope of the FCA’s Insurance Conduct of Business Sourcebook (ICOBS), Product Intervention and Governance Sourcebook (PROD) and the Consumer Duty.

The definition retains the product-specific elements of the current ‘contracts of large risk’ definition but will apply to all other non-investment insurance contracts the same thresholds as those in the relevant categories of ‘eligible complainant’ in the dispute resolution (DISP) section of the FCA handbook. The result is a definition that would put a broader group of commercial customers outside of the scope of the relevant rules than the ‘contracts of large risks’ definition did. 

The FCA has also proposed changes to the way its rules apply to co-manufacturing arrangements so as to allow co-manufacturers to select a lead firm as being solely responsible for complying with the manufacturer’s obligations under PROD 4.2 on an optional basis. Firms will need to set out that election clearly in the co-manufacturing agreement. If co-manufacturers choose not to elect a lead, the current rules – each co-manufacturer remains responsible for complying with its obligations as a manufacturer – will apply by default. Only an insurer or a Lloyd’s managing agent may be selected as lead, meaning that an intermediary co-manufacturer would not be permitted to act as the lead.

Insurance expert Rob Paine of Pinsent Masons said: “Whilst the proposals relating to contracts of large risks will impact firms manufacturing or distributing insurance products to commercial customers, other proposals go further. The proposed changes to the co-manufacturer rules, for example, affect all firms co-manufacturing non-investment insurance products and so will be of interest to firms operating in the personal lines space as well.”

The consultation also contains proposals to broaden the scope of the current exclusion of bespoke non-investment insurance contracts from the requirements of PROD 4 to both insurers and intermediaries, regardless of whether they are manufacturers. It seeks to address the challenges around how the PROD rules apply to bespoke insurance products by providing rules and guidance on what products should or should not be considered bespoke.

The FCA is also proposing to bring the insurance product governance rules into line with the Consumer Duty requirement to review products regularly. Currently the product governance rules in PROD 4.2 require firms to review their non-investment insurance products every 12 months and more frequently where the potential risk associated with the product makes it appropriate to do so.

Change is also proposed in respect of the training and competency requirements that apply to employees of insurance intermediaries distributing non-investment insurance and to employees of funeral plan firms, with the FCA proposing to remove the prescriptive 15-hour CPD requirement and the corresponding monitoring and record keeping requirements.

In addition to consulting on these specific proposals, the FCA is inviting feedback on other potential rule changes, including on the application of its rules to insurance business outside of the UK and on other product-specific rules, such as those relating to packaged bank accounts and payment protection contracts.

Following the consultation period, the FCA intends to confirm the final rules in a policy statement to be published in autumn 2025.

Insurance law expert Iain Sawers of Pinsent Masons said: “We encourage firms with SME and large risk customers to review the proposals and consider engaging with the FCA before the deadline to provide their comments and inputs.”