Traditionally in the UK real estate market, landlords have taken on the responsibility of arranging insurance on behalf of their tenants. Landlords will typically take a commission for this work, charged as a percentage of the premium, to remunerate themselves for arranging and administering policies on behalf of their tenants. Historically, these commissions have sometimes been applied in excess of 30%.
However, over the past decade we have seen a shift away, with significant downwards pressure on landlord commission retentions. In more recent times, the challenging conditions in the insurance market and other socio-economic impacts, have caused insurance premiums to soar. This has prompted much closer scrutiny of commission levels and their implications for landlords and tenants, by the authorities and regulators.
In the first half of 2023, the focus on landlord commission has intensified, and we have seen a significant amount of additional examination around insurance commissions. This has largely stemmed from an investigation by the Financial Conduct Authority (FCA) into the practice. This found that leaseholders are paying increased insurance premiums, fuelled, in part, by the high levels of insurance commissions paid to freeholders, landlords and managing agents.
What the UK Government have said…
The Secretary of State for Levelling Up, Housing and Communities, Michael Gove, is leading the challenge on behalf of the UK government. In response to the FCA investigation, he said that he was “…in all candour, outraged by the findings” (opens a new window). Gove went on to say that he intends to ban freeholders and managing agents from taking buildings insurance commissions.
What the FCA have said…
The FCA is proposing new rights and protections for leaseholders to improve the transparency of multi-occupancy leasehold buildings in the insurance market. Yet, it is assumed that this new legislation will not take effect instantly; there are still many hurdles to face.
Whilst we wait, the FCA have said it expects brokers to immediately cease paying commissions to third parties (including property managing agents and freeholders), where they do not have appropriate justification and evidence for doing so. The FCA will undertake further reviews across various products and will consider implementing the full range of regulatory tools available to it, as this work is progressed.
What it means for landlords, property owners and managing agents
Mr Gove’s comments have been met with a range of responses from the property sector, with some suggestion that there has clearly been a misunderstanding of the interaction between brokers and landlords. The fact is that the administration of an insurance programme can take significant time and resource and many that retain commissions are simply trying to offset the cost of this to their business.
One thing that is clear, is that the FCA expects brokers to ensure that there is fair value in the distribution chain. In this regard, if you are retaining commissions from your insurance programme, it is important you think about the activities you undertake on behalf of your customers.
Potential activities include:
• Premium collection from multiple parties
• Providing insurance advice
• Time spent meeting with your clients and broker
• Assisting with claims process.
The Lockton Approach
Lockton clients retain less commission than average, according to Lockton Global Real Estate and Construction's (GREAC) research, even though commission is tied to the premium. Lockton will always market risks on a “Fair Analysis” basis and uphold the principle of recommending insurance policies that are in the best interests of leaseholders. We'll work with clients to get the best result as insurance, regulation and politics change.