There is a disturbing development in the UK property market that is affecting leasehold property owners severely. There is enough evidence to show the existence of unfair practices in relation to unfair insurance commissions. In recent times, there has been a significant variation in the commission rate paid by the insurers to the brokers. The commission has often been 30 percent or more, which is a cause for concern.
The FCA Report
The Financial Conduct Authority (FCA)’s report on insurance for multi-occupancy buildings has taken note of eye watering commission levels charged by some unscrupulous landlord and/or their Managing Agents coupled with an upward trend in the price of insurance premiums being written. In many instances the fall-out from Grenfell and water damage insurance claims being priced into the market. The new Secretary of State for Levelling Up, Housing & Communities, Simon Clarke, has written to British Insurance Brokers’ Association (BIBA) chief executive Steve White about the matter.
The 67-page report notes that the premium charges for residential buildings with multiple occupancies have doubled between 2016 and 2021.
The report states, “The commission rate paid by the insurer to the broker varies significantly. In most cases, within the observations we received and used for our analysis, it is at least 30%. The level of some commissions in this market is an area of significant concern.” According to Mr. Clarke, brokers in their workshop said they share commissions so that freeholders and property managing agents can be remunerated for the support they provide to procure insurance. It also takes care of the costs of post-sales service.
Inflated Broker Commissions Affecting Leaseholders
It is a common practice for property managing agents to be remunerated by leaseholders for the services they perform through a service charge. Freeholders have a limited role in obtaining insurance. So, it is often not clear why property managing agents or freeholders should receive additional remuneration via broker commissions.
The FCA said it would review the insurance brokers charging the highest commissions. They would also consider further rules on remuneration.
Mr. Clarke states further that the financial pressure placed on leaseholders is unacceptable. When talking about excessive commissions at the expense of leaseholders he said it was “ unethical and must cease as a matter of urgency.” Meanwhile, other findings of the FCA include a complete lack of transparency and disclosure for leaseholders from the insurance and property sectors and a reduction in the supply of coverage. Those that are RICS Regulated have a duty to disclose their commissions, as to Managing Agents as a result of the Insurance Act 2015. But there is no such duty on Freeholders.
FCA’s recommended remedies include providing easy methods for leaseholders to challenge high insurance costs passed on to them. They also want to introduce more transparency in the process of providing information on the pricing of the insurance. The MP has promised that his department will work closely with the FCA to take quick action against unfair commissions. “I would like to see immediate changes to this practice and expect a proposal from BIBA setting out how you will address broker commissions and reform culture and practice within the market ahead of any further regulatory activity.” The MP also wants Chief Executive Steve White to work on a pooling solution with the Association of British Insurers and improve the quality and availability of data in this market area.
A Managing Agents perspective
Insurance commissions for Managing Agents are already in effect self regulating because unlike Freeholders, Managing Agents are required to disclose any insurance commissions they receive in the service charge accounts. Reputable Managing Agents tend to charge a lower fee where they manage insurance matters which in part subsidises this extra work and pays for the time and expense of FCA Regulation, and a higher fee where they do not.
The extra work commissions fund includes proposal forms, declarations, subsidence investigations,administering and signposting claims, FCA returns, providing policy details to persons buying and selling their properties or re-mortgaging. In the same vein Freeholders should be required to disclose commissions they receive. Why, oh why, The insurance Act 2015 did not require Freeholders to disclose insurance commissions remains a mystery to
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