FCA simplifies rules for insurance firms

What does this mean?

Rescoping the application of consumer duty and PROD

The FCA has set out a new definition for determining contracts and customers that will fall outside the scope of its conduct rules in ICOBS, PROD and the Consumer Duty. Previously, this test was those engaged in a ‘contract of large risk’. The FCA has now split this test into two distinct definitions:

• Specialist risk contracts: this aligns with the product specific exclusions under the previous rules. Contracts of insurance covering aircraft, ships, goods in transit and other specific activities are treated as specialist commercial business and are generally outside the conduct rules in ICOBS, PROD and the Consumer Duty where there are no retail policyholders or stakeholders.
• Large commercial customers: these are customers of any general insurance product which exceed the thresholds of the small and medium sized enterprise (SME) eligible complainant definition within the DISP handbook. This aligns with the test for eligible complainants referring complaints to the FOS.  

Through this new definition of ‘large commercial customer’, the FCA has clarified that where there is more than one policyholder, the DISP-aligned thresholds are applied only to the main policyholder (the party who makes the arrangements preparatory to concluding the contract). Firms must still consider whether a product has, or could have, retail consumers who are policyholders or stakeholders (for example, residential leaseholders), and ICOBS, PROD and the Consumer Duty continue to protect those retail customers in the same way as before. 

Customers exceeding the DISP SME eligible complainant thresholds will generally fall outside Consumer Duty, ICOBS and PROD conduct rules, so the lower thresholds mean fewer customers will now receive these protections.

Changes to co-manufacturing arrangements

Under previous rules, all product co-manufacturers were required to conduct approval processes to determine if products represented fair value - duplicating effort. Under the new rules, firms can select one lead firm responsible for compliance with the obligation, or can continue with the previous approach.

To adopt the new lead-manufacturer approach:

• The lead firm must be an insurer or Lloyd’s managing agent.

• The lead firm must have ‘significant involvement’ in the product's manufacturing.

• All co-manufacturers must have a written agreement setting out the lead firm's responsibility for compliance and liability for breaches (including potential redress), as well as co-manufacturers’ full co-operation with information sharing. 

The FCA has included an evidential provision within the rules setting out how firms can demonstrate ‘significant involvement’. 

Bespoke contract exclusion

Having previously only applied to intermediaries, the bespoke contracts exclusion now applies to both insurers and intermediaries, regardless of whether they are manufacturers. All bespoke non-investment insurance contracts (both general insurance and pure protection) are therefore excluded from PROD4’s scope.

Given previous industry confusion on what constitutes a bespoke insurance contract, the FCA has clarified when this exclusion can be relied upon. An overarching principle is that a customer must have requested the product, it be solely for that customer’s needs and go beyond what the firm’s existing products cover. 

The FCA has clarified product governance obligations under ‘products and services’ and ‘price and value’ Consumer Duty outcomes, do not apply when the bespoke contract exclusion is satisfied. 

Product monitoring and review

Firms were required to review non-investment insurance products every 12 months, or more frequently where risks associated made it appropriate to. Firms now only have to review products ‘regularly’, with review frequency based on each products potential for customer harm arising from risk factors associated with the product.

The FCA has set out a minimum number of risk factors firms should consider in reaching their review frequency. Firms will likely be able to reduce review frequency for many products, although this will ultimately be led by each products risk profile.

Application to non-UK business 

The FCA reiterated their broader review of the application of Consumer Duty to non-UK customers, due to take place in Q2 2026.  The FCA intend to align consultation on non-UK insurance business in parallel with this. 

CP25/37

Alongside the final rules, the FCA also consulted to remove handbook rules relating to PPI eligibility and disclosure, packaged bank account eligibility and annual statements and expectations for manufacturers and distributors regarding value measures data.

What do firms need to do?

Firms will need to address the requirements on product monitoring and review frequency, ensuring they have sufficient governance and records in place to withstand FCA scrutiny and illustrate how the frequency of review is proportionate to product risks. Utilising MI is essential to achieve this, and firms should consider utilising risk factors they monitor, which the FCA may not have set out in its guidance. 

Firms must also embrace the opportunity to reduce some regulatory burdens, to avoid ending up competitively disadvantaged, such as reviewing policies which may qualify as bespoke contracts able to take advantage of the PROD4 exclusion.

Next steps

Changes within the policy statement take place immediately, with no transition period. Firms will be able to feedback on FCA proposals from CP25/37 until 27 January 2026 with the FCA anticipating an associated policy statement published in Q2 2026.