New rights and protections are being sought for leaseholders to improve transparency of the multi-occupancy leasehold buildings insurance market.
At the same time, the government has reconfirmed its intention to ban commissions to third parties.
The Financial Conduct Authority (FCA) wants leaseholders to be defined as the customers of multi-occupancy buildings insurance. This would require insurance firms to act in leaseholders’ best interests and prevent them from recommending policies based on commission or remuneration levels.
It follows a review by the FCA, published today, which found average insurance broker commissions rose by 46% per policy. Firms sampled paid over £80m to other parties, usually the freeholder or the property managing agent.
The review also identified ‘significant shortcomings’ by some brokers in applying fair value rules to their remuneration practices and the impact on those ultimately paying the costs of multi-occupancy buildings insurance.
The FCA says it expects brokers to immediately stop paying commissions to third parties (including property managing agents and freeholders) where they do not have appropriate justification and evidence for doing so in line with rules on fair value. It will also take appropriate action where firms have weaknesses in meeting their regulatory obligations.
The Department for Levelling Up, Housing and Communities says it intends to ban the payment or sharing of insurance commissions with property managing agents, landlords and freeholds.
In a letter to the FCA, secretary of state for levelling up, housing and communities Michael Gove MP writes: “I was, in all candour, outraged by your findings. Your report strengthens my resolve to ban property managing agents, landlords and freeholders taking commissions on buildings insurance and replace with transparent fees.
“Third-party commissions are inflating the cost of covering insurance placement and handling fees. Managing agents should be completely transparent about where service charges go.”
Gove added he supports the FCA’s intention to, subject to consultation, formalise the rights of leaseholders in a product’s fair value assessment and asked that any resultant changes are implemented by autumn.
The FCA says it will work with DLUHC to ensure action is fully delivered.
FCA executive director of consumers and competition Sheldon Mills says: “We want to give leaseholders more rights and the information they need to exercise them. Importantly, under our proposals, those selling multi-occupancy insurance will have to act in leaseholders’ best interests.
“Our review revealed large commissions paid by some brokers to freeholders and third parties, like managing agents, with little evidence of any valued added to justify these payments. We are taking action against these practices and won’t hesitate to take further action if brokers don’t comply with our rules.”
