FCA confirms leasehold buildings insurance reforms

The FCA has this morning (29 September 2023) confirmed planned measures designed to support leaseholders in the multi-occupancy buildings insurance market. 

From 1 January 2024, the regulator will force insurance firms to “act in leaseholders’ best interests, treat leaseholders as customer when designing products and will be banned from recommending an insurance policy based on commission or remuneration levels”. 

It added that insurers would also be required to ensure their products provide fair value to leaseholders and supply important information about their insurance policies and pricing, including details of any commissions paid. 

This confirmation follows comments made at the beginning of the year (30 January 2023) by Michael Gove, secretary of state for levelling up, housing and communities, who indicated that he would move to ban this practice and end “unusually high broker commissions”.

Leaseholders in multi-occupancy buildings are beholden to the insurance purchasing choices of their freeholders, who place buildings insurance with brokers, despite leaseholder service fees covering the cost of the policy. 

Leaseholders have no ability to procure their own buildings cover or even view the policy arranged by the freeholder because they have not previously been defined as customers to the policy.

However, following today’s confirmation of a change in regulation, the FCA said that it expected 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” in line with Consumer Duty rules on fair value. 

In a previous statement, when it announced its intention to bring in new protections for leaseholders, the FCA noted that it had identified “significant shortcomings by some brokers in applying fair value rules to their remuneration practices” within this specific market.

The Department for for Levelling Up, Housing and Communities also announced that it would move to ban the payments or sharing of insurance commissions with property managing agents, landlords and freeholders. 

New protections 

Sheldon Mills, the FCA’s executive director of consumers and competition, said: “Insurance firms must now act in leaseholders’ best interests and ensure that their policies provide fair value. 

“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.” 

An FCA statement added that it would undertake further reviews across various products and would consider “the full range of regulatory tools available” to it as its work progressed. 

Branko Bjelobaba, principal at compliance consultancy Branko, said: “I am not surprised with the government deciding to ban the sharing of commissions –  the new rules will ensure transparency, but do leaseholders really want to know by how much they are being ripped off?

“They will still have no choice in arranging the insurance for their properties. I am ever hopeful that the insurance sector will now have to consider the interests of leaseholders rather than see them as a cash cow for the benefit of everyone else.”