Simplification of Insurance Rules and the new ‘SME Watershed’
On 9 December 2025, the FCA published a policy statement (PS25/21) on proposals to simplify its insurance rules. This policy statement largely confirms the changes put forward in CP25/12, which we discussed in our previous article.
Determining which rules apply to commercial insurance – the ‘SME Watershed’
As proposed, the FCA has significantly reduced the scope of the conduct rules for insurers set out in the Insurance: Conduct of Business Sourcebook (ICOBS), the Product Intervention and Product Governance Sourcebook (PROD), and under the Consumer Duty. The impact is to reduce the regulatory burden on firms insuring larger business, whilst maintaining appropriate protections for smaller commercial customers.
Currently, “contracts of large risks” are excluded from the scope of PROD 4 and the Consumer Duty, and subject to fewer ICOBS rules. The FCA had proposed in the consultation to implement the desired reduction in scope by replacing the term “contracts of large risks” with “contracts of commercial and other risks”, which essentially lowered some of the thresholds that are included in the “contracts of large risks” definition.
In the final implementation, the FCA has instead split this into two separate definitions for:
- Specialist risk contracts, which are contracts of insurance covering railway rolling stock, aircraft, ships, goods in transit, aircraft liability and liability of ships , and credit and suretyship for certain commercial activities. This replicates the business lines which are currently treated as de facto “contracts of large risks”; and
- Larger commercial customers, who are commercial customers falling within one of the following categories:
- a charity with annual income of £6.5m or more;
- a trustee of a trust with net asset value of £5m more; or
- an enterprise which is not:
- a micro enterprise (being an entity with a turnover / balance sheet of €2m or less; or (b) fewer than 10 employees); or
- a small business (being an entity with annual turnover of less than £6.5m and either (a) fewer than 50 employees or (b) a balance sheet of less than £5m).
This corresponds to the thresholds used when assessing the scope of the Dispute Resolution: Complaints Sourcebook (DISP) and the jurisdiction of the Financial Ombudsman Service (FOS).
Moving forward, specialist risk contracts and general insurance contracts distributed to larger commercial customers will fall outside the scope of PROD 4 and the Consumer Duty (essentially aligning their scope to those eligible to take complaints to FOS), and will be subject to a limited application of ICOBS.
Respondents raised concerns about how the definition of “larger commercial customer” would apply where there are multiple policyholders. The FCA has clarified that these DISP-aligned thresholds apply to the main policyholder (being the customer that makes the arrangements preparatory to the conclusion of the policy).
Product governance rule changes
Co-manufacturing arrangements
The FCA has finalised the rules as consulted. Firms co-manufacturing insurance products will have the option to nominate a single “lead” firm to take responsibility for the manufacturer obligations under PROD 4.2, provided certain conditions are met.
The FCA had indicated that it would consider allowing intermediaries to take on the role of “lead” firm. It has decided not to do so, based on concerns about insurers no longer being responsible for the fair value of the product, but may revisit this in the future.
Bespoke contracts exclusion
The FCA has likewise proceeded with only minor amendments to its previous proposals on the bespoke contracts exclusion. The bespoke contracts exclusion will be widened to include insurers as well as intermediaries, and new guidance has been added to PROD 1.4, clarifying the scope of the exclusion.
A bespoke contract must be created solely and specifically for and at the request of a customer and tailored to that customer’s needs. However, the guidance notes that a contract may still be ‘bespoke’ even where it is (i) adapted from an existing product (beyond what the existing product covers), (ii) contains existing product wording, and/or (iii) is reused upon a request from another customer seeking similar coverage in the future.
Product monitoring and review
As per the consultation proposals, the frequency of product reviews and reviews of product distribution arrangements is now at the discretion of the manufacturer and distributor respectively, based on the risk of customer harm. An annual review is no longer mandatory.
ICOBS disclosure and Employers’ Liability notification and reporting requirements
The FCA has decided not to amend the ICOBS disclosure rules to capture co-manufacturing arrangements, but has proceeded with its changes to the notification and reporting requirements for employers’ liability business.
Other changes
Insurance and funeral plan employees are no longer required to undertake a minimum 15 hours of CPD every year – though firms must still ensure CPD is sufficient to maintain appropriate levels of knowledge and competence.
During 2026, the FCA will be considering:
- whether to remove the rules for guaranteed asset protection, packaged bank accounts, and payment protection insurance;
- whether to amend the territorial scope of the Consumer Duty, ICOBS, and PROD; and
- whether to make further simplifications to its insurance rules, including customer classification and regulatory reporting.
Next steps
The final Handbook text is set out at Appendix 1 to the policy statement.
The rules came into force immediately on 9 December 2025.
If you have any questions about the 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 co-authored by Sam Sykes, Associate at CMS.
