Simplifying Insurance Regulation: FCA Confirms Major Rule Changes, With More to Come

The FCA has finalised and implemented a package of reforms aimed at simplifying insurance regulation, reducing costs for firms, and supporting growth, while maintaining appropriate protections for consumers and smaller commercial clients. These measures, set out in Policy Statement PS25/21 and related consultations, are now in effect and represent one of the FCA’s most significant recalibrations of insurance conduct rules since the introduction of the Consumer Duty.

Below, we break down what’s changing, who it affects, and what firms should be planning for next.

Why Is the FCA Simplifying the Rules?

The UK is a world leader in commercial insurance, and the FCA acknowledges the role the sector plays in underwriting complex global risks. In Chapter 1 of PS25/21, the regulator makes clear that simplification is not deregulation; rather, it’s about modernising rules to reflect:

• A more outcomes-based approach under the Consumer Duty

• The need to distinguish between sophisticated corporate buyers and smaller commercial customers

• The importance of reducing friction, duplication, and outdated prescriptive requirements

The FCA states its objective as:

“reducing regulatory requirements and resulting processes, while maintaining appropriate consumer protection.”

Key Changes Firms Can Adopt Now

Clearer boundary for commercial insurance (“SME watershed”):

One of the most important reforms now in force is the FCA’s replacement of the long-standing concept of “contracts of large risks” with a clearer and more logical framework, commonly referred to as the SME Watershed.

Under the previous regime, the “large risks” definition blurred two distinct questions:

• Is the risk itself specialist or complex?

• Is the customer sufficiently large and sophisticated to fall outside conduct protections?

This caused uncertainty and inconsistent application across ICOBS, PROD and the Consumer Duty. In particular, the FCA has clarified that certain categories of business are subject to modified or disapplied requirements under ICOBS and PROD 4, depending on the nature of the risk and the characteristics of the customer. These changes are now in force and reflect two distinct regulatory concepts, each operating for different reasons.

1. Specialist Risks Contracts

   Certain contracts are treated as specialist risks based on the nature of the insured risk itself, such as aircraft, ships, goods in transit and other inherently specialist categories. For these contracts, aspects of ICOBS and PROD 4 are disapplied to reflect the FCA’s view that they are typically negotiated in specialist markets, with professional advisers and sophisticated risk assessment, regardless of the size of the customer.

2. Larger Commercial Customers

   Separately, commercial customers are excluded where they exceed the SME thresholds set out in DISP, regardless of the type or complexity of the general insurance product purchased. A customer qualifies as a larger commercial customer where it exceeds any two of the following three criteria:

   - Annual turnover of more than £6.5 million

   - Balance sheet total of more than £3.26 million

   - More than 50 employees (typically assessed on a full-time equivalent basis)

   These thresholds are applied objectively, using information reasonably available to firms, such as published accounts. Importantly, they align with the size tests already used for complaints-handling purposes, meaning firms should already have governance and data in place to apply them consistently.

   
   

   Where a policy has multiple policyholders, the size assessment is applied by reference to the party making the arrangements preparatory to the conclusion of the contract, helping to ensure that SMEs and retail interests are not inappropriately deprived of regulatory protections.

   
   

   Crucially, where a policy has, or could have, retail consumers as policyholders or stakeholders (for example residential leaseholders under a block policy), ICOBS and PROD protections continue to apply to those retail customers, even if the policyholder itself is a larger commercial entity.

   
   

Expanded “bespoke contracts” exclusion

The bespoke contracts exemption is widened and clarified. Advertising a general appetite for specialist risks no longer counts as marketing a product and does not disqualify a contract from being bespoke.

Option to appoint a single lead insurer for product design & approval

Firms may now appoint a lead firm to take sole responsibility for product governance under PROD 4, but only insurers or Lloyd’s managing agents may take on this role. This remains optional and does not extend to MGAs at this stage due to supervisory concerns around consumer harm.

Flexible product review cycles

The fixed 12-month review requirement has been scrapped. Manufacturers must determine the appropriate review interval based on product risk, and keep a clear record of their rationale. Review frequencies must be shared with distributors on request.

Removal of EL insurance notifications and annual reporting

The FCA is abolishing EL notification requirements and Annual audit and director certification returns. The rules are relocated to ICOBS 8, and firms must still report significant breaches.

Removal of the mandatory 15 hours of CPD

The controversial fixed 15-hour CPD requirement is gone. Firms must still ensure staff competence but are free to set training levels appropriate to roles. The FCA reaffirmed that this is not a lowering of standards.

Industry Reaction: Broad Support, Some Frustrations

Industry bodies largely welcomed the FCA’s reforms, seeing them as overdue steps toward proportionate regulation.

Positive reception:

• IUA praised progress on clarifying retail vs. wholesale boundaries.

• CII supported flexibility around CPD, emphasising tools like its Professional Map to maintain standards.

• Broadstone highlighted practical benefits such as clearer client segmentation and streamlined EL processes.

Criticism and calls for faster reforms

• LMA called the reforms a “missed opportunity”, urging action on bigger issues such as territorial scope, Consumer Duty application overseas, and clearer definitions of “consumer”, issues the FCA has punted to 2026.

What's Coming in 2026?

The FCA has signalled major additional changes next year:

• Possible disapplication of the Consumer Duty to non-UK business: Consultation expected by Q2 2026, with review of ICOBS and PROD scope in parallel.

  
  

• Review of core definitions: Including retail customer and policyholder, to address ongoing complexity.

  
  

• Further streamlining of data reporting: Following the removal of REP022 and proposals to delete three pricing data returns.

  
  

• Review of GAP insurance rules: Given persistent concerns about poor value.

  
  

• Disclosure simplifications: Especially for complex or legacy products.

What This Means for Firms

These changes offer firms genuine opportunities to rethink compliance frameworks:

• More risk-based, flexible governance: Scrapping the 12-month review cycle allows firms to apply proportionality and focus attention where product risk is highest.

  
  

• Reduced administrative burden: Removal of EL reporting and fixed CPD thresholds will make internal compliance operations less resource-heavy.

  
  

• Greater clarity in commercial markets: The SME watershed reforms help distinguish sophisticated buyers from smaller enterprises, reducing over-regulation for large corporates.

  
  

• A shift towards shared responsibility under the Consumer Duty: Optional lead-firm models allow more efficient co-manufacturing but still ensure insurer oversight.

  
  

• Need to prepare for 2026 reforms: Particularly around international business, GAP, definitions, and reporting.

Compliance Angle View

The FCA’s simplification agenda is not window dressing; it marks a meaningful shift away from prescriptive, legacy requirements that often created unnecessary burden without improving outcomes. However, many firms and trade bodies want the regulator to go further, faster, particularly in relation to overseas business and the Consumer Duty’s scope.

For now, insurers, brokers, MGAs, and funeral plan providers should familiarise themselves with PS25/21, make strategic decisions about optional measures (like appointing lead firms or adjusting CPD frameworks), and engage actively with consultations running into early 2026.

Contact Us

Contact Compliance Angle at info@complianceangle.co.uk or call +44 7427 792594 to schedule a free consultation and ensure your firm stays aligned, efficient and ready for the next phase of UK regulatory reform.