FCA revamps UK insurance market rules with more reform to come

The FCA outlined its final rules for simplifying insurance and funeral plan requirements in a policy statement published on 9 December. The statement follows the publication of a consultation paper in May on proposed amendments to the FCA's insurance rules, designed to simplify the regulatory regime while providing an adequate level of consumer protection.

The new rules (74 pages / 860KB) aim to provide firms with greater flexibility and autonomy by introducing an element of optionality to the application of certain rules, with a view to moving away from the previous ‘one size fits all’ approach.

Many of the rule changes have been implemented as outlined in the consultation paper. This includes the rule change relating to the appointment of a lead firm to take on the product manufacturer responsibilities under Product Intervention and Governance Sourcebook (PROD) 4.2. The optional to appoint a lead firm has been retained. This means that the current requirements, where all co-manufacturers are equally responsible for meeting the PROD 4 requirements, remain unchanged.

However, the FCA decided not to make a proposed consequential change to its Insurance Conduct of Business Sourcebook (ICOBS) disclosure rules, which would have meant that only the lead firm would be responsible for producing the ICOBS disclosures.

Daniela Ivanova, an insurance law expert at Pinsent Masons, said: “Not surprisingly, the FCA has remained unmoved from its position not to allow intermediaries co-manufacturing an insurance product, such as managing general agents, to be a lead manufacturer taking sole regulatory responsibility for those products delivering fair value. The FCA’s arguments are that insurers are parties to the contract and responsible for ensuring claims are met and insurers are also more highly capitalised than intermediaries to meet claims and to pay redress if required.”

Ivanova added: “Insurers providing capacity to managing general agents will continue to walk the tightrope of retaining enough control over a product to be able to comply with their co-manufacturer responsibilities, because the buck will still stop with them.” She said the FCA had left the door open to revisiting this issue and businesses should adopt a “wait-and-see” approach to see whether the regulator is likely to change its position in the future.

As expected, the FCA has also adopted its proposals related to bespoke contracts of insurance and the frequency of product reviews with some minor amendments. In terms of product reviews, the FCA has removed the requirement to review products at a minimum every 12 months, instead allowing firms to decide how frequently product reviews need to take place based on each product’s potential risk for consumer harm.

The FCA reports that the highest number of responses it received to the consultation related to its proposed removal of the prescribed 15-hour continuing professional development (CPD) requirement for employees. It says it proceeded with removing the requirement to give firms “greater flexibility” to determine “how to ensure appropriate competency and capability” of employees.

In its consultation, the FCA also proposed a 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 ICOBS, PROD and the consumer duty. In response to concerns around the proposed definition’s application to policies with multiple policyholders, the FCA also introduced a revised definition to address those concerns by identifying larger commercial customers and specialist risks contracts separately. The statement indicates there may be further work on this area in 2026.

Instead of simplifying the definition of contracts of large risks as was floated in its May consultation, Ivanova said the FCA is proposing to break this up into two definitions: an SME threshold aligned with the Financial Ombudsman Service complainant eligibility threshold in the Dispute Resolution: Complaints Sourcebook  (DISP), and a specialist risks contracts definition, which will follow the specialist risks set out in the definition of contract of large risks.

She said it remains to be seen whether the effect of the two definitions will disapply the same rules for large commercial customers and customers of specialist risks, or not.

Following on from the FCA’s 30 September letter to HM Treasury, the FCA has published a short statement (3 pages / 110KB) on its expectations for co-manufacturers of products and services. The statement does not set new requirements or standards but is intended to give firms more clarity on the FCA’s supervisory expectations and sets the scene for further work it intends to carry out in this space.

The statement also reiterates the regulator’s plan for the first half of 2026 to consider views and concerns surrounding the application of the consumer duty. This work will include a review of the rules covering co-manufacturers. The FCA also identifies some areas where there have been misconceptions by regulated firms in distribution chains, including in decision-making, allocation of responsibility, liability, and outsourcing. 

The FCA has also published a series of other related papers seeking industry feedback. It has launched a consultation on targeted clarifications which includes proposals to remove specific eligibility and disclosure rules for payment protection insurance (PPI) and specific eligibility rules and annual statement requirements for packaged bank accounts (PBAs). 

The proposed changes are driven by the FCA’s view that they “consider that the general eligibility rules applying to non-investment insurance contracts, alongside the Duty, are sufficient to protect customers with PPI and PBAs”. Other proposals include deleting additional expectations for manufacturers and distributors in relation to value measures data to simplify and streamline the rules and removing the minimum 12-month product review for funeral plans. The consultation on these proposals is open until 26 January 2026.

The regulator is also seeking views by 2 February 2026 on client categorisation to reset how firms distinguish between retail and professional clients and proposals to rationalise rules on conflict of interests in the senior management arrangements, systems and controls (SYSC) 10 and SYSC 3 sourcebooks by removing minor distinctions between rules that currently apply to different types of activity, without changing the current scope or application of the rules for firms.

The FCA has also issued a separate quarterly consultation which includes a proposal to decommission three data returns applicable to firms submitting general insurance pricing practices data returns. Comment can be made on the data return decommissioning proposals until 19 January 2026.

These consultations follow the regulator publishing a bumper package of proposals ahead of the festive season designed to strengthen retail investment across the UK.

Iain Sawers, an insurance law expert at Pinsent Masons, said the consultations would provide businesses with an “opportunity to further shape the simplification and streamlining” of rules governing the sector in 2026. “We would encourage firms to review the proposals and consider engaging with the FCA before the relevant deadlines to provide their comments and inputs,” he added.