FCA cracks down on apartment building insurance practices

The UK Financial Conduct Authority (FCA) is taking a tougher approach on commissions paid in the multi-occupancy building insurance market and proposes improved rights and protections for leaseholders hit by surging premiums following a review.

Under the proposals, leaseholders would be defined as building insurance customers, while firms would be explicitly required to act in their best interests and would be barred from recommending a policy based on commission or remuneration levels.

Insurers and brokers would need to provide more information about policies to leaseholders, including detail of commissions paid. Most flats in Great Britain are purchased on a leasehold basis. Terms are usually long and often last 90 or 120 years.

FCA has been concerned that the levels of commission and commission sharing practices don’t always represent fair value for those bearing the insurance costs.

Average per policy broker commissions rose 46% over a 2019-2022 review period and firms in a sample paid more than £80 million ($148 million) in commission to other parties.

“Our review revealed large commissions paid by some brokers to freeholders and third parties, like managing agents, with little evidence of any value added to justify these payments,” Executive Director of Consumers and Competition Sheldon Mills said.

“We are taking action against these practices and we won’t hesitate to take further action if brokers don’t comply with our rules.”

The Department for Levelling Up, Housing and Communities has announced that it intends to ban the payment or sharing of commissions with property managing agents, landlords and freeholds.

The UK Secretary of State for Levelling-up, Housing and Communities Michael Gove asked the FCA in January last year to review the multi-occupancy buildings insurance market after the 2017 Grenfell tower fire exposed problems and contributed to surging premiums.

Mr Gove says he is “outraged” by the FCA findings in its latest documents and will be writing to the British Insurance Brokers Association (BIBA).

“Your report strengthens my resolve to ban property managing agents, landlords and freeholders taking commissions on buildings insurance and replace with transparent fees,” he says in a letter to the FCA.

BIBA in an extensive response says it supports changes such as improved transparency for leaseholders and says it believes they should be treated as “partial beneficiaries” in the insurance contract.

Members are already adjusting their practices to stop sharing of commission with property managing agents, freeholders and landlords, it says.

BIBA says the FCA finds premiums have increased by 56% in the review period, while broker earnings have increased 40%.

“The increase in average broker commission accounts only for 20% of the increase in gross premiums written so we contend that the increase in commission earnings is not the primary driver of increased insurance costs being paid by leaseholders,” it says.

“The report does not acknowledge the fact that, in the current climate, work being done by brokers to place these sometimes very difficult risks with complex reinsurance arrangements has increased substantially.”

BIBA says inflation is at its highest point in 30 years, professional indemnity costs for brokers have increased significantly, and the group has worked on the development of a reinsurance scheme for the real estate segment.

It was a “serious omission in the report” to not highlight the insurance premium tax (IPT), which has delivered increased earnings to government, as a driver of harm, BIBA says, while reiterating a call for an IPT exemption for cladded buildings undergoing or awaiting remediation.

The FCA has released a consultation on its proposed changes, with comments due by June 9.