Irregularities in leasehold insurance

In a scathing criticism of the Financial Conduct Authority (FCA), Insurance Business magazine has strongly condemned the regulatory body for its lack of action in addressing leasehold insurance irregularities. The magazine highlighted a recent instance where FCA officials appeared before the Treasury Sub-Committee and provided what many consider being evasive and misleading answers.

Government Treasury Sub-Committee Insurance investigation of FCA

During the committee session, Harriet Baldwin MP, chair of the committee, confronted Sheldon Mills, the FCA's executive director for consumers and competition, about the long-standing issue of inflated commissions in the leasehold insurance market. She questioned why such blatant problems persisted under the FCA's watchful eye, given that the organisation had existed since 2013.

Mills responded by making a rather shocking statement. He indicated that the FCA had only become aware of these concerns shortly before being prompted by Michael Gove to start an investigation.

The response from the FCA left many, including us here at Ringley Chartered Surveyors, who manage thousands of homes, predominantly for leasehold entities such.as Resident Management Companies and Right to Manage Companies, astounded and disheartened. The FCA's stance is unbelievable and untenable There also seems a reluctance or disinterest in taking strong and decisive action to resolve the situation.

Sir Peter Bottomley MP leader of the all party Leasehold Reform movement, said on Insurance Commissions and Leaseholder overcharging

Sir Peter Bottomley MP, a seasoned figure in Parliament, also expressed his frustration at this development to the FCA's apparent neglect of the transparency and fairness of the leasehold insurance charging. He pointed out that experts, regulators, and insurance companies had long been privy to the issue. He described it as a case of profiting at the expense of the masses and demanded swift action.

Insurance commission investigation. What action will the FCA take?

In response to the mounting criticism, the FCA issued a statement outlining its intentions to implement reforms offering leaseholders greater rights and transparency within the multi-occupancy buildings insurance market. These measures include:

• Mandating insurance firms to prioritise leaseholders' interests.
• Prohibiting policy recommendations based on commission levels.

The FCA promised to take action against firms that cannot adhere to these rules.

Do freeholders of leasehold blocks of flats have to share with leaseholders the commissions they receive?

Sadly, the simple answer is No. The requirement for freeholders of leasehold blocks of flats to share the commissions they receive can depend on several factors, including the terms outlined in the lease and applicable regulations. Here are a few key points to consider:

1. Disclosure Requirements: The Commonhold and Leasehold Reform Act 2002 do not require freeholders to disclose insurance commissions, nor do any other Act.

2. Reasonable Costs: Freeholders are only entitled to recover reasonable costs incurred in managing the property, including commissions paid to third parties. So, the costs and commissions charged must be considered reasonable and justifiable in relation to the services provided. Consequently, most insurance cases taken to tenancy-agreements-made-easy'>planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>Tribunal are settled outside tenancy-agreements-made-easy'>planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>Tribunal, so freeholder overcharging does not become commonplace knowledge.

3. Lease Provisions: The lease agreement itself may contain specific provisions regarding the disclosure of commissions or fees received by the freeholder. In my 30 years of practicing, I have never become across a lease that required the freeholder to share insurance commissions information with the leaseholders.

4. RICS Code of Practice: The Royal Institution of Chartered Surveyors (RICS) has a Code of Practice for residential servicechargesorted.co.uk/blogs/digital-solution-can-improve-the-whole-process-by-making-it-faster-and-more-transparent'>service charges. This code encourages transparency and disclosure of commissions received by the freeholder or managing agent. It advises that all such commissions should be disclosed to leaseholders. Whilst RICS members should observe this Code of practice, there is no such obligation to a freeholder.

5. The Insurance Act 2016: This Act primarily focuses on the law governing insurance contracts and related matters. The Insurance Act 2016 does not specifically address the disclosure of insurance commissions in leasehold properties or freeholders. However, in terms of insurance regulation, such as general insurance and consumer protection, there are requirements for the disclosure of commissions or fees received by insurance intermediaries or brokers. These requirements aim to promote transparency and ensure that consumers are aware of the financial arrangements and potential conflicts of interest. In short, this means that only Managing Agents and Insurance brokers need to declare commissions, not the freeholder of a block of flats.

how much do insurers pay freeholders and Managing Agents as insurance commissions

So, what is the Financial Conduct Authority's (FCA) role in regulating insurance intermediaries and brokers in relation to insurance commissions on blocks of flats?

The Financial Conduct Authority (FCA) regulates insurance intermediaries and brokers in the UK, and they have issued rules and guidance on commission disclosure. The FCA expects insurance intermediaries to disclose any fees, charges, or other benefits they receive that could reasonably be expected to have a material impact on the advice provided or the consumer's decision-making process. So if a block of flats is managed by a Managing Agent and that Agent Places the insurance, insurance commissions should be disclosed in the servicechargesorted.co.uk/blogs/digital-solution-can-improve-the-whole-process-by-making-it-faster-and-more-transparent'>service charge accounts. Commissions on a policy affected by a freeholder would most likely not.

So, where can a leaseholder get redress for unfair insurance premia and commissions?
Leaseholders who have concerns about the disclosure of commissions or other financial matters should consider engaging with their freeholder or managing agent to seek clarification and escalate the matter through appropriate channels, such as the Leasehold Valuation tenancy-agreements-made-easy'>planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>Tribunal or the First-tier tenancy-agreements-made-easy'>planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>Tribunal (Property Chamber) in England and Wales.

And, how much do insurers pay freeholders and Managing Agents as insurance commissions?

The recent Treasury Sub-Committee meeting followed the FCA's earlier review, which uncovered commission payments exceeding 80 million to property managing agents and freeholders via insurance brokers between January 2019 and September 2022.

What is Michael Gove and the Levelling Up Agenda doing regarding insurance commissions for blocks of flats?

The FCA identified a lack of evidence supporting fair value where third parties, including freeholders, benefited disproportionately. Michael Gove, Secretary of State for Levelling Up, Housing and Communities, has pledged that a more transparent fee structure will replace this practice of taking commissions.

The 2005 formal FCS investigations into insurance commissions for residential leasehold blocks of flats.....

In a curious twist, the 2005 FSA report noted that organisations like LEASE and the Leasehold Valuation tenancy-agreements-made-easy'>planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>Tribunal were cognisant of the problem. However, they needed more concrete details or data to substantiate the claims. The Association of Residential Managing Agents, approached by the FSA, also claimed ignorance of abuses within leasehold insurance.

As criticisms mount and scrutiny intensifies, the FCA faces growing pressure to tackle these long-standing issues effectively and take decisive measures to rectify the systemic shortcomings in the leasehold insurance market.