Belinda Bagnall, Managing Director of Residentsline, looks at the FCA’s proposals to reform multi-occupancy leasehold insurance.

Following their government-requested review, the Financial Conduct Authority is proposing “new rights and protections for leaseholders to improve the transparency of the multi-occupancy leasehold buildings insurance market.”

They are proposing a change in the rules so that leasehold residents will be defined as ‘customers’ when it comes to their buildings insurance. This would create a huge shift in the requirement of the market and will ensure that insurers act in the best interest of the leaseholders themselves.

What’s Happened So far?

In January 2022, Michael Gove (Secretary of State for Levelling Up, Housing and Communities) requested that the FCA

“review the market for multi-occupancy buildings insurance and consider recommendations to achieve the goal of widely available and affordable cover”, following concern around unfair fees being charged to Leaseholders.

In the same month, the FCA wrote to insurers and brokers to make it clear that they should be

“taking leaseholders into consideration when designing and distributing products, and determining whether they are providing fair value”, despite the fact that leaseholders are not classed as a ‘customer’.

They then started work on the requested review in May of 2022, analysing data from 16 insurance brokers and considering data on policies and remuneration from 1st January 2019 to 30th September 2022. Their findings were then published on the 21st September 2022.

The review found that almost a third of the cost of insurance premiums could be made up of commission and fees, and that service charge demands were not transparent enough for this to be easily spotted by Leaseholders.

Mr Gove responded to the findings as follows:

“The report confirmed my concerns regarding large buildings insurance premium increases in multi-occupancy residential buildings, evidence of weak competition in the market and unacceptable issues faced by leaseholders around the transparency of their insurance costs.

I will take action to ban managing agents, landlords and freeholders from taking commissions and other payments when they take out buildings insurance, replacing such payments with more transparent fees. I will press insurance firms, managing agents, landlords and freeholders to change their practices as a matter of priority.

I will also arm leaseholders with more information to enable them to better scrutinise their insurance costs, while also ensuring that leaseholders are not subject to unjustified legal costs and that they can claim their legal costs back from their landlord.

These steps will ensure leaseholder insurance costs are fairer, more transparent and will rebalance the legal costs regime to give leaseholders greater confidence to challenge their costs, supporting fair value for the leaseholder. My officials will continue to update you as this work progresses.”

The FCA’s April 2023 Consultation Paper has been published in response to their findings- namely concerns about the amount brokers are earning, the amounts being paid to freeholders and managing agents and the resulting questions around fair value for leaseholders.

An FCA’s Broker Renumeration Review, also published on the 21st April 23, found that:

  • Average per policy insurance broker commission rose by 46% over the review period.
  • Firms in the sample paid over £80m of commission away to other parties, usually the freeholder or the property managing agent.

“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” were also identified.

Why Not Being the ‘Customer’ is an Issue

Leaseholders have always paid for buildings insurance premiums via their service charges. But they are not considered the ‘customer’. Instead, the choice of insurer and policy is entirely up to the Residents’ Management Company, Freeholder or Managing Agent.

This leaves leaseholders open to abuse by unscrupulous insurance firms and the parties that arrange the insurance on their behalf, who have been proven to agree to higher premiums in exchange for a share of inflated broker commission. The unnecessarily high costs are then passed to the Leaseholders who are not protected by the FCA’s rules as they are not the policyholder. The FCA’s proposals seek to change this and to also provide ‘greater disclosure’ for leaseholders.

What Does the Consultation Paper Say and What Happens Next?

You can read the Consultation paper here, but in effect, the FCA are proposing rules changes that should ensure:

  • That leaseholders are properly considered during the design of insurance products.
  • That the prices of those products provide fair value to leaseholders and freeholders alike.
  • That any renumeration received by any of the parties involved in a policy purchase has a fair relationship to the benefits provided to the leaseholders
  • That leaseholders are provided with sufficient information to be able to spot and challenge any unfair practises or costs.

Some key quotes from the paper include:

“Under the proposals, leaseholders would be defined as customers of buildings insurance. The rule changes would explicitly require insurance firms to act in leaseholders’ best interests, and bar firms from recommending a policy based on commission or remuneration levels. Insurers and brokers would also need to provide more information about insurance policies to leaseholders, including detail of any commission paid.”

“We expect 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 our rules on fair value. We will undertake further reviews across various products and will consider the full range of regulatory tools available to us as this work is progressed.”

“The Department for Levelling Up, Housing and Communities has announced that it intends to ban the payment or sharing of insurance commissions with property managing agents, landlords and freeholds. We will work with DLUHC to ensure that this action is fully delivered, including changing FCA rules if required.”

The FCA will be gathering responses to its proposals until the 9th June 2023.

They will then publish a Policy Statement in the following quarter. This will lay out the FCA’s response to the feedback received and lay out its final rules.

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