FCA proposes rule changes to enhance UK insurance market competitiveness

The Financial Conduct Authority (FCA) has consulted on a series of potential rule changes laid out in CP 25/12 that are aimed at enhancing the regulatory framework for non-investment insurance business and funeral plans. These changes seek to address overlapping regulations and streamline compliance processes to better serve the insurance sector and its customers.

Why the change of rules?

The changes, initially detailed in the FCA's discussion paper on regulation of commercial and bespoke insurance business (DP 24/1) reflect the FCA's commitment to reducing regulatory burdens and promoting effective competition.

The proposed changes include redefining rules for commercial insurance, simplifying co-manufacturing responsibilities, broadening exclusions for bespoke contracts, and adjusting review frequencies based on product risk. Additionally, the FCA plans to remove certain notification, reporting, and training requirements to ensure proportional regulation.

What can firms expect?

The proposed changes by the FCA are set to streamline regulatory requirements for the UK insurance sector, potentially reducing operational costs for firms and enhancing market competitiveness.

The most significant proposal is to broaden current exclusions from Insurance Conduct of Business Sourcebook, or ICOBS, and the Product Intervention and Product Governance Sourcebook (PROD) for "contracts of large risk" to cover a new category of "contracts of commercial or other risks".

The proposed category will include certain classes of insurance (such as shipping, credit and suretyship), as well as any class of non-investment insurance with clients who are not eligible complainants under FOS rules. In doing so, the FCA aims to better identify larger commercial insurance customers that do not require the same protections as retail consumers or small businesses.

Simplifying co-manufacturing responsibilities is another key change, allowing firms to select a lead manufacturer responsible for complying with product governance obligations under PROD 4. This would reduce duplicative processes and potentially lower costs, making it easier for firms to collaborate and innovate in product development. There are restrictions though: the lead firm must be an insurer or managing agent (brokers cannot lead), they must be sufficiently involved to justify a "lead" status, and lead firms will need to accept all liability under PROD.

Staying with product governance, the FCA has proposed a broader exclusion for bespoke contracts, which will now apply to both intermediaries and insurers of  non-investment insurance contracts and will include more guidance from the FCA on its application.

This move aims to increase the practical utility of the bespoke contracts exclusion, enabling firms to tailor products more effectively to meet specific customer needs without being constrained by standard regulatory requirements. The FCA has also suggested removing the minimum 12-month review requirement under PROD 4, so that firms would instead determine and record the most appropriate review frequency based on the product's potential for customer harm.

The FCA also plans to remove certain notification, reporting and training requirements. For instance, the proposals include eliminating the employer's liability insurance notification and annual reporting requirements, as well as the 15-hour continuing professional development (requirement for employees of insurance intermediaries and funeral plan firms. These changes aim to reduce compliance burdens and allow firms to determine appropriate training and knowledge requirements for their employees.

What next?

Following the consultation period that ends on 2 July, the FCA aims to publish a policy statement detailing the finalised rules and their implementation timeline. The proposed changes are expected to come into force immediately after the policy statement is issued, allowing firms to utilise the added flexibilities as soon as possible.

Osborne Clarke comment

These reforms aim to reduce regulatory burden and will undoubtedly be welcomed by the insurance sector.

However, much like other recent FCA proposals, this is not wholesale regulatory reform but a targeted approach to specific provisions that have become unnecessarily burdensome or created unforeseen complexity.

If the final rules remain largely unchanged, firms should be looking at their product governance arrangements and client classification processes to see if they can capitalise on the new rules.