FCA proposes more tailored commercial insurance regime

What does this mean?

Clarifying commercial insurance rules

As discussed in DP24/1, the FCA is proposing a new definition to be used for determining the contracts and customers that fall outside of the scope of its conduct rules in ICOBS, PROD and the Consumer Duty.

The distinction between SMEs and larger commercial customers is currently made using the defined term ‘contracts of large risks’. For specified insurance products, a contract is a large risk if the customer meets certain thresholds of turnover, balance sheet size and employee numbers. In addition, some products are always classed as large risks (e.g. aviation insurance). 

The FCA proposes to create a new definition (‘contracts of commercial or other risks’), which is based on lower thresholds, aligned to the definition of ‘eligible complainant’ in the FCA’s Dispute Resolution rules. The definition will maintain the product-specific provisions from the ‘contracts of large risks’ definition.  

The change means the conduct rules would apply to a smaller number of commercial customers. Firms would be able to decide whether to apply the new definition to categorise customers, or continue to consider all customers to be within the scope of protections.

Product governance reforms

Co-manufacturers

As discussed in DP24/1, the regulator proposes giving co-manufacturing firms the option to appoint one lead insurer (or managing agent) to comply with its rules, in instances where more than one party is involved in designing an insurance product. An intermediary is not permitted to take on this role.  

If firms choose to continue to follow the current rules (instead of selecting a lead insurer), the regulator proposes guidance in relation to their responsibilities and cooperation. 

Bespoke contract exclusions

The FCA is also proposing extending the scope of bespoke contract exclusions. The exclusion currently applies only to intermediary co-manufacturers; the regulator proposes extending it to insurers and all intermediaries. This will mean all bespoke non-investment insurance contracts (both general insurance and pure protection) are excluded from PROD 4. 

Bespoke contracts are built to suit one customer upon that customer’s request, which means they automatically have the protections the product governance rules provide. The FCA proposes rules and guidance to clarify when a contract falls within the exclusion. 

Product value assessments

In addition, as set out in Feedback Statement FS25/2, on plans to streamline the rulebook in light of Consumer Duty, the FCA suggests removing the requirement in PROD 4.2 for firms to review the value of their non-investment insurance products at least every 12 months. Instead, firms would be required to determine the frequency of reviews based on each product’s potential for customer harm (the FCA will propose a minimum list of factors for firms to take into account). This would bring the rule in line with fair value requirements under Consumer Duty, which requires firms to review their products regularly. 

Reporting and training changes

The FCA proposes removing duplicative annual reporting and employer’s liability notification requirements.

It also proposes removing the specified minimum hours of training and development required for insurance and funeral plan employees.

Further potential reforms for discussion

In addition, the FCA invites feedback on further changes it is considering. It would issue a separate consultation before taking these forward.

Applying conduct rules to insurance business outside the UK

Broadly, the FCA’s rules apply to firms undertaking regulated activities in the UK, regardless of where the customer is located. The regulator acknowledges that this could result in firms being subject to conflicting or overlapping requirements. To address this, the FCA already disapplies ICOBS and PROD 4 rules in certain situations, but is considering taking this further where customers and insured risks are both located outside the UK. 

Options under consideration include: explicitly excluding all activities involving non-UK business from the ICOBS rules, and disapplying all of PROD 4 in relation to non-UK business. 

Streamlining rules

The FCA is also considering removing certain rules in the ICOBS sourcebook which it believes are no longer fit for purpose. 

What do firms need to do?

While proposals to ease the compliance burden – including changes to Consumer Duty scope and reporting requirements – will be well received by firms, the most significant impact is likely to be felt in the commercial space, particularly through the widened carve-out for commercial products. For retail and SME markets, changes may be more limited and nuanced.

Co-manufacturers, particularly co-insurers in the London Market, should reflect upon the most appropriate approach for sharing or allocating the product governance requirements in the context of the proposed new rules.

Proposed changes to the frequency of value assessments for non-investment insurance products will require careful consideration. Firms should consider what processes need to be introduced to assess the frequency of fair value assessments, if moving away from annual assessments. It is worth noting that the changes may not come into force in time for this year’s cycle of assessments.

Next steps

The consultation period ends on 2 July 2025. The FCA will publish a policy statement in due course, and proposes the rule changes come into effect immediately upon finalisation. A separate consultation will be issued on the additional reforms under consideration, before these are taken forward.