Following announcements from the Financial Conduct Authority (FCA), the UK Government has now outlined its intention to ban the payment or sharing of insurance commissions for residential buildings with managing agents, freeholders, and landlords, suggesting that these parties replace them with transparent administrative fees.
Proposed changes within the King’s Speech 2023
In the much-awaited King’s Speech on 7 November 2023, King Charles III set out the Government’s priorities for the coming parliamentary session. The speech proposed various items of legislation (opens a new window), including the Leasehold and Freehold Bill and the Renters (Reform) Bill. If introduced, these changes will have a direct impact on the property industry.
Among the most notable of these changes, outlined within the Leasehold and Freehold Bill, was a proposal to prohibit the current practice where insurance brokers may share their commission with landlords, freeholders, and managing agents (to cover their administration costs), and for those parties to make a separate, transparent fee charge to cover their future administration costs.
As such, if the Leasehold and Freehold Bill comes into effect, these proposals will constitute a ban on the payment or sharing of insurance commissions for residential buildings with certain parties.
Background and context – ensuring a fair value for leaseholders
The proposals outlined within the King’s Speech are the culmination of a series of measures by both UK Government and the Financial Conduct Authority (FCA) to ensure ‘fair value’ for leaseholders, including a growing emphasis on the commissions process.
Historically, certain landlords, property owners, and managing agents have negotiated with brokers and insurers to receive a share of the commission awarded to insurance brokers (a percentage of the gross insurance commission excluding taxes). This process (known as ‘ceding’) has typically been used by landlords, owners, and agents to offset the cost of carrying out administrative tasks, such as gathering information, organising Reinstatement Cost Assessments, and dealing with insurance claims for each insurance renewal and issuing documentation to leaseholders.
The FCA and Leasehold Valuation Tribunals have identified cases where they consider that the commission earned by the property owners or managing agents had been ‘excessive’. Such cases have become more frequent in recent years as a result of the increasing amounts of insurance brokerage renumeration, which are themselves an effect of the higher insurance premiums imposed across the residential property sector.
These trends follow in the wake of the 2017 Grenfell Tower fire, which prompted greater scrutiny into the presence of combustible materials within muti-occupancy high-rise buildings, and the risk that such materials present to building safety. The need to disclose such materials to insurers, as well as a general hardening of the market and reductions in insurer capacity, are primarily responsible for the increase in insurance premiums.
Fair value timeline – key communications and information
September 2022
The FCA published its ‘Report on Insurance for Multi-Occupancy Buildings (opens a new window)’ – the result of the FCA’s review into the operation of the multi-occupancy buildings insurance market, requested by the Secretary of State for Levelling-up, Housing and Communities in consultation with the Competition and Markets Authority (CMA).
The findings highlighted several areas of concern, which resulted in an FCA consultation (CP23/8).
January 2023
The Secretary of State for Levelling-up, Housing and Communities wrote (opens a new window) to Nikhil Rathi, Chief Executive of the FCA, outlining his intention to “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.”
April 2023
On 21 April 2023 the FCA published two documents and issued these to insurance brokers:
A report, ‘Multi-occupancy buildings insurance – broker remuneration (opens a new window)’, summarising the findings of its review
A consultation paper (Cp23/8), ‘Multi-occupancy building insurance Feedback to the September 2022 Report and consultation on Handbook changes (opens a new window)’, setting out the intention to provide “good value” to the end users and beneficiaries of the insurance covers arranged (i.e. the leaseholders and residents)
In the FCA’s view, the market was not working as well as it should be for leaseholders, who thereby receive poor outcomes from the products purchased on their behalf. They also identified significant shortcomings by some brokers in applying “fair value” rules to their remuneration practices.
The FCA announced that they expected brokers to immediately stop paying commissions to third parties (including property managing agents and freeholders) without appropriate justification and evidence for doing so in line with their rules on customer “fair value”.
The FCA announced that it would take appropriate action where firms have significant weaknesses in meeting their regulatory obligations, including on “fair value” for leaseholders.
The FCA also communicated that they would work with the Department for Levelling Up, Housing and Communities (DLUHC) to ban the payment or sharing of insurance commissions with property managing agents, landlords and freeholders, including changing FCA rules if required.
September 2023
On 20 September 2023, the FCA wrote to insurers warning them to act as it publishes its latest “fair value” data. The regulator warned and reminded insurers of their expectations to make sure they are checking that their products are providing “fair value” to their customers.
On 29 September 2023, Sheldon Mills, Executive Director of Consumers and Competition, FCA set out details of the FCA’s new policy statement (opens a new window), published in response to CP23/8, and announced the final rules, to come into effect on 31 December 2023.
Sheldon Mills made several key statements, including:
“Insurance firms must now act in leaseholders’ best interests and ensure that their policies provide ‘fair value’” to customers.
“Our reforms will help to strengthen the insurance market by providing new protections for leaseholders. We will not hesitate to take action if firms breach these rules.”
This reform, and new rules are designed to provide better value and increased transparency for leaseholders and residents (particularly those in multi-occupancy buildings), and to give them additional rights in relation to the insurance cover being arranged, where they pay the premiums.
November 2023
Publication of the King’s Speech, including details of the proposed Leasehold and Freehold Bill. This confirmed the intention of DLUHC and the UK Government to ban the payment or sharing of insurance commissions with property managing agents, landlords and freeholders.
Guidance for landlords, property owners and managing agents
We are aware that those of our clients who are property managing agents, landlords and freeholders will be keen to learn more about the abolition of commission sharing for residential properties, and their replacement with administrative fees where the lease permits.
This is an ongoing matter, and the outcome remains unknown until the detail of the legislation is finalised, which we expect will be forthcoming during the current parliamentary term.
Your Lockton service team will be in contact to discuss your individual insurance programme implications and any options available shortly. Lockton remain in discussions with various parties (including the British Insurance Brokers’ Association, the FCA and DLUHC) and we will share any updates we receive on this matter as soon as we are able to do so.
For further information, please visit our Lockton Global Real Estate & Construction (opens a new window) page, or contact your usual Lockton service team.
