FCA considering ‘rules to limit commission’ for multioccupancy buildings insurance

The FCA has informed Michael Gove, the secretary of state for housing, communities and local government, that it would consider introducing rules to limit commissions for multioccupancy buildings insurance were it to identify fees paid to brokers as a “significant cause of harm”.

In a letter published yesterday (10 May 2022), the financial regulator explained that it was also considering amending rules to allow leaseholders to access information about insurance policies purchased by freeholders.

This came alongside a suggestion from the regulator that the legal obligations insurers currently owe to freehold property owners could be extended to leaseholders, which may include a requirement to ensure that commissions “should not conflict with leaseholders’ interests”.

The letter explained: “If our industry data gathering identifies that firms are not complying with our rules, we will take appropriate action using our regulatory tools.”

The FCA’s letter was sent to Gove in response to his request in January 2022 for the regulator to investigate the issue of hidden commission fees and rising costs for residential leaseholders.

Gove requested that the FCA present a series of “practical recommendations” for how the issue could be resolved by government, the industry or the regulator.

As Insurance Times reported at the beginning of the month, the FCA has since been gathering information on this topic from the industry. In its letter, the regulator confirmed: “We are gathering data and engaging with the industry to better understand [its] approach to pricing.”

In addition to issuing data requests to “a range of insurers and intermediaries” and meeting with representatives from insurers and brokers, the FCA said it planned to “hold further in-depth workshops with the industry, whilst carrying out detailed analysis of pricing, fair value and looking for potentially unfair practices through both quantitative and qualitative analysis”.

The regulator explained that it had identified drivers of practices that could be causing “harm” to leaseholders, including insurers “shying away from bidding for new business” or “charging particularly high premiums, due to perceived issues with buildings’ safety and quality”.

It added: “However, we are concerned that factors such as high commission paid to brokers and property managers – and a lack of competitive pressure on prices – could also be leading to harm.”

Sheldon Mills, the FCA’s executive director for consumers and competition, explained: “It is too early for us to confirm the harms present in the market or to make any recommendations about how they can be addressed.

“We will use the information we gather from [the] industry to further develop options for potential interventions, including where we conclude that market or government led interventions may be beneficial.”

Potential harms

In a section of the letter setting out identified “failures in the market” that may be causing harm to residential leaseholders, the FCA set out a list of factors that were contributing to costly commission fees.

These included potential harms in relation to pricing and product supply, insurers raising premiums for multioccupancy buildings without cladding risks and harms relating to product distribution.

Considering the dangers around product distribution, the FCA explained that “freeholders, property managing agents and insurance brokers may be selecting insurance policies that maximise their own remuneration, rather than the policy that offers the best value for leaseholders”.

This follows complaints from various leaseholder organisations towards their buildings insurers, which Insurance Times has reported on in recent months.

To identify risks in this area, the FCA explained that it had “significantly expedited” its normal approach to gathering data, “designing and undertaking work that may eventually result in material interventions”.

It clarified: “However, it has been important to ensure the data requests are robust enough to support any subsequent interventions.”