Clifford Chance

The UK Financial Conduct Authority (FCA) has launched Consultation Paper CP25/12 to simplify its Handbook rules for commercial insurance business. The purpose of the consultation is to reduce administrative burdens on insurers by eliminating onerous or outdated rules while aligning the insurance conduct regulatory framework with the UK government’s economic priorities to enhance the UK's global competitiveness under the FCA’s secondary statutory objective.

The focus of the reform builds on the Consumer Duty regime and is informed significantly by insights gathered through the Commercial and Bespoke Insurance Business Discussion Paper DP24/1 which sought to establish which FCA rules in the commercial insurance sector could be removed or simplified without compromising on protection required for small and medium-sized (SME) enterprise customers..¹

The deadline for responses to the consultation is 2 July 2025.

Key Proposals and Their Implications

1. Redefining Commercial Insurance Protections

The key reforms redefine the categorisation and protection framework for commercial insurance clients to distinguish more clearly between the differing risk profiles of retail and commercial insurance. This includes a new definition of “contracts of commercial or other risks” to replace the previous definition of “contracts of large risks” as used in PROD and ICOBS, and in the definition of ‘retail market business’ which sets the scope of the Consumer Duty. The effect of this revised definition would be to exempt larger commercial entities (as well as continuing to exempt contracts covering high-value risks such as aviation or marine exposures) from retail-level protections under ICOBS, PROD 4, and the Consumer Duty.

Such a change better reflects the difference in bargaining power and sophistication between commercial customers and retail consumers and therefore the level of regulatory protections that should reasonably be afforded to commercial customers. In order to determine the scope of the exemption the FCA has proposed to adopt thresholds aligned with the Financial Ombudsman Service (FOS) “eligible complainant” criteria, bringing greater consistency and alignment with the rules.

These changes are welcome and will benefit those insurers offering commercial insurance products to customers above this new threshold. The "eligible complainant" criteria is one that firms will be familiar with and it should make the position clearer for both firms and customers.

2. Co-Manufacturing Flexibility

The second important development addresses the uncertainty in the "Consumer Duty" rules regarding responsibility for co-manufacturers. To this end, the FCA have proposed a framework allowing multiple firms involved in designing or distributing an insurance product to designate a “lead manufacturer” responsible for compliance with PROD 4.2 product governance requirements. The non-lead co-manufacturers would then be exempt from certain PROD 4 obligations but must still cooperate with the lead firm to ensure compliance. Importantly, the proposed changes would apply to all co-manufacturing arrangements for non-investment insurance products (both commercial and retail, including pure protection policies).

The move towards a co-manufacturing regime is helpful, in particular for the subscription market. However, the FCA proposal only leaves open the possibility of insurers or Lloyd's managing agents being designated as "lead manufacturers". As such, it does not address a scenario where an MGA or other intermediary acting under delegated authority is, in practice, the lead manufacturer of a product rather than the insurer. While the FCA position aligns with the general principle of insurer responsibility for policies, it does seem an area where a more nuanced approach could be taken given that MGAs and intermediaries are also FCA regulated.

In addition, it is not necessarily the case that even where the insurer is the lead manufacturer—defined as the party with “significant involvement" in the manufacture of the product—that they should bear sole responsibility for redress if a co-manufacturer has also assumed responsibility for key elements of a product (e.g. exclusions). Firms may opt to continue following existing rules instead of appointing a lead manufacturer if this does not reflect the commercial reality of the product manufacturing process. However, it would clearly be preferable to have the certainty of a lead manufacturer regime which is fit for purpose. The FCA plans to issue guidance clarifying the threshold for “significant involvement” and the scope of the lead firm’s obligations.

3. Bespoke Contracts Exclusion

Again, building on earlier proposals in DP24/1, the FCA seeks to expand the existing exemption from PROD 4 requirements to cover all bespoke non-investment insurance contracts—applying to both insurers and intermediaries (the current exclusion applies only to intermediary co-manufacturers). The consultation provides examples of “bespoke” products as those specifically adapted to a single client’s requirements, even if the core structure could be repurposed for other clients with similar demands.

While this broader exclusion may reduce costs for firms offering specialised coverage (e.g., large corporate risks or niche sectors), the lack of a specific definition for “bespoke” introduces risks of inconsistent interpretation and application. A key challenge for firms will lie in distinguishing between genuinely bespoke products (such as unique policies for multinational corporations) and lightly modified mass-market offerings that retain standardised features. The FCA’s forthcoming guidance on this delineation will be important in order to prevent misuse of the exemption, particularly in hybrid markets like SME insurance, where the boundary between tailored and standardised products is often ambiguous.

4. Risk-Based Review Frequency

The FCA propose to move away from the mandatory 12-month review cycle outlined in PROD 4.2 for non-investment insurance products. Instead, the FCA proposes a more flexible approach, where firms determine the frequency of their product reviews based on an assessment of the potential for customer harm. This risk-based approach aims to introduce a more proportionate and outcome-focused framework.

While this shift offers welcome flexibility and allows firms to allocate resources more effectively towards higher-risk products, it places a greater onus on firms to develop and implement robust risk assessment frameworks. The FCA has not indicated that it will publish guidance on compliance with this, and without clearly defined and prescriptive standards from the FCA, disparities in review practices could emerge across the industry.

5. Employers’ Liability (EL) Reporting Reforms

The FCA proposes to remove several existing reporting obligations related to Employers’ Liability (EL) insurance. This includes the removal of the requirement for annual EL policy notifications and the submission of directors' certificates and audit reports to the FCA. The obligation to provide certificates and reports to the Employers’ Liability Tracing Office (ELTO) will, however, remain.

This move reflects the FCA’s commitment to proportionality and acknowledges the established effectiveness of ELTO in tracing EL insurance policies. By transitioning to a breach-only reporting model for the FCA, the aim is to reduce administrative costs for firms. Firms are therefore expected to proactively identify and escalate material breaches promptly. This aligns with the FCA’s post-Consumer Duty emphasis on outcomes over process.

6. Training and Competency Deregulation

The consultation paper proposes the abolition of the mandatory 15-hour annual Continuing Professional Development (CPD) requirement for intermediaries involved in the distribution of non-investment insurance and funeral plans. Instead, the FCA intends to grant firms greater autonomy in designing and implementing their training programs, while still retaining the overarching duty to ensure that their employees possess the necessary competence for their roles. The existing guidance on relevant knowledge areas will be maintained as non-binding reference material.

Implications for the Market

The proposed reforms are definitely a move in the right direction toward better reflecting the differing risk profile between retail and commercial insurance. By shifting further towards principles-based regulation, the reforms grant firms—especially commercial insurers—greater flexibility in approach.

However, it is questionable whether this will materially boost the UK’s global competitiveness and innovation given the proposals address an area for firms where there has been low risk of non-compliance in practice. It does feel an overstatement by the FCA that these changes will reduce barriers to entry in the insurance market – and there is a sense that these proposals could have gone further in removing some of the complexity in the FCA Handbook and we would hope to see further work from the FCA in this area, particularly around the scope of consumer duty.

Nevertheless, insurers and intermediaries stand to benefit from reduced compliance costs associated with these changes. For these reforms to achieve their dual objectives of promoting growth and ensuring adequate consumer protection, the FCA is likely to complement deregulation with further targeted thematic reviews to identify emerging risks and instances of non-compliance. It is important that all stakeholders actively engage in this process to shape a regulatory regime that balances innovation with market integrity.

¹ For further information, please see our article: FCA Focuses on Addressing Regulatory Challenges in the Commercial and Bespoke Insurance Sector - 28 August 2024