On 14th May 2025, the UK Financial Conduct Authority (FCA) published a consultation paper (CP25/12) on proposals to simplify its insurance rules for insurance firms and funeral plan firms. The proposals aim to streamline FCA rules and guidance and reduce unnecessary burdens on firms, while ensuring adequate consumer protection.
Determining which rules apply to commercial insurance
The FCA proposes to introduce a new definition, referred to as "contracts of commercial and other risks", to replace the current "contracts of large risks". Under this new bespoke definition, large commercial insurance customers and those entering into contracts covering specific large risks would not be captured by the FCA's conduct rules set out within the Insurance: Conduct of Business sourcebook (ICOBS), the Product Intervention and Product Governance sourcebook (PROD), as well as the Consumer Duty. This would reduce the regulatory burden on firms insuring larger businesses deemed capable of managing risks independently, while maintaining appropriate safeguards and protections for smaller commercial customers.
The new definition will retain certain of the product-specific provisions from the "contracts of large risks" definition, which means that a number of specific large risks (such as aviation and marine) continue to be de facto captured by the new definition. The core change, however, involves removing the high thresholds that previously applied to other lines of business. These are to be replaced by thresholds that are aligned with those used for determining whether an entity is an "eligible complainant" for the purposes of the Financial Ombudsman Service (FOS). The effect, therefore, is to align the application of ICOBS, PROD 4 and the Consumer Duty with the scope of other key consumer protections, ensuring greater consistency to the rules and clarity for both firms and customers.
Although the conduct of insurers and insurance distributors would no longer be within the scope of key conduct rules in respect of a broader range of commercial customers, the FCA notes that many of these customers already lack access to the FOS due to their size and resources and therefore deems it appropriate to grant them a lesser degree of regulatory protection. These customers will still be granted protections under the Principles of Business and certain other FCA high-level rules.
Product governance rule changes
Co-manufacturing arrangements
Where more than one firm manufactures insurance products, firms will have the flexibility either to follow the rules (where manufacturing responsibility is shared) or select one "lead" firm to assume sole responsibility for manufacturing insurance products under PROD 4.2. This will need to be clearly set out in a written agreement, which will also need to include acceptance by the lead of all liability for any breach, and a commitment by all non-leads to cooperate with the lead as needed. Importantly, under the proposals, the lead must be an insurer or a Lloyd's managing agent; a Managing General Agent or Lloyd's coverholder cannot therefore be the "lead" manufacturer for PROD 4.2 purposes.
The proposed rule changes aim to prevent inefficient duplication of processes and assessments, the resultant costs for firms, and duplicative data requests being sent to distributors. It is also intended to better facilitate innovation in the market.
Bespoke contracts exclusion
Following the industry's response to the discussion paper (DP24/1), the FCA proposes to broaden the scope of the bespoke contract exclusion to include both insurers and intermediaries offering non-investment insurance products (including commercial and retail, and general insurance and pure protection). The FCA proposes rules and guidance to clarify when a contract falls within this exclusion:
- A bespoke contract may be an adapted version of an existing insurance product beyond what it covers, or a new insurance contract created in response to a customer's request, provided that it is specifically requested by and tailored to a customer's needs.
- Firms may rely on existing product wording when developing a bespoke contract.
- A bespoke contract may also be offered to other customers seeking similar coverage in the future, provided it meets each customer's particular needs and has not been marketed for general distribution, even to a niche market.
The FCA also clarifies that merely adjusting an existing product through standard options will not render a contract bespoke, even if customers can select from different coverage levels or optional extras. While many open markets will likely satisfy the conditions of bespoke contracts, firms should carefully assess whether all the conditions are met before excluding them from product governance assessments. The FCA stresses that products (including niche products) marketed or offered for general distribution will not be considered bespoke, regardless of how small the target market is.
Product monitoring and review
Under the proposals, manufacturers will no longer be required to review their non-investment insurance products on at least an annual cycle. Instead, firms would adopt a risk-based approach to the frequency of the review cycle, based on the product's potential for customer harm, based on numerous factors that must be considered. Firms would need to keep a record of the review frequency determined for each product and the rationale for this.
In addition, for distributors, the FCA proposes to replace the requirement that firms must review their product distribution arrangement in relation to a non-investment insurance product at least every 12 months, with requirements comparable to those detailed in respect of product reviews.
Firms will also be expected to consider the frequency of their reviews regularly for non-investment insurance products and adjust this as required in response to any new data.
ICOBS disclosure and Employers' Liability notification and reporting requirements
Following industry feedback, the FCA proposes that in a co-manufacturing scenario, where a lead firm is selected, it would be responsible for producing the required information and would also assume responsibility for producing the Insurance Product Information Document.
The FCA no longer considers the ICOBS 8.4 notification requirements and the SUP 16.23A annual reporting requirements, applicable to Employers' Liability (EL) firms, proportionate in the EL market and therefore proposes to remove them.
Other changes
Insurance and funeral plan employees must undertake a minimum of 15 hours of Continuing Professional Development annually. The FCA views this as overly prescriptive and inflexible for the varied needs of different employees and is therefore proposing to remove this requirement and the corresponding monitoring and record-keeping requirements. Instead, firms would have greater flexibility in monitoring the knowledge and competence of these employees in a more proportionate manner for their business and the employee's role.
The FCA emphasises that the proposals are not designed to lower the standard of consumer protection and that employees must continue to have the necessary skills, knowledge and expertise to carry out their roles.
Chapter 7 of the consultation discusses other areas that the FCA considers could benefit from potential rule changes, including the territorial scope of its insurance conduct rules and whether it should further disapply rules in circumstances where customers and insured risks are both located outside the UK.
Next steps
The draft Handbook text is set out in Appendix 1 to the consultation and the instrument will be referred to as "Simplification: Conduct And Product Governance Of Non-Investment Insurance Business And Other Amendments Instrument 2025".
The FCA invites comments on the consultation paper by July 2. The FCA intends that any rule changes come into force immediately after it publishes its policy statement.
If you have any questions about the proposed changes and how these are likely to impact your firm, please get in touch with the key contacts listed or your usual contacts at CMS, who would be happy to discuss these considerations in more detail.
This article was previously published by Reuters Regulatory Intelligence.
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