FCA sets out new protections for leaseholders in multi-occupancy leasehold buildings insurance market

The FCA has proposed a slew of new rules intended to better protect leaseholders in the multi-occupancy leasehold buildings insurance market.

Released late last week (21 April 2023), the new proposals would define leaseholders in these buildings as customers of the buildings insurance and bar firms from recommending a policy to a property managing agent or freeholder based on commission values.

In its statement, the regulator said it had identified “significant shortcomings by some brokers in applying fair value rules to their remuneration practices” within this specific market.

In a review it conducted on levels of broker remuneration in this sector – which analysed data from 16 insurance brokers on policy data and remuneration between January 2019 and September 2022 – it found that average per policy insurance broker commission rose by 46% across the review period.

The new proposals represent the culmination of an FCA investigation into the multi-occupancy leasehold buildings insurance market, which began in May 2022.

An FCA report was then released in September 2022, in which the regulator said it could use its powers to increase the amount and transparency of information related to leaseholders on the pricing of insurance they were paying for.

At the beginning of the year, Insurance Times also reported that Michael Gove, secretary of state for levelling up, housing and communities, had indicated that he would move to ban the practice of secret commissions paid to property managing agents and freeholders by insurance brokers.

At the time, Gove also wrote to FCA chief executive Nikhil Rathi to explain that he was “concerned about the lack of regulatory protections for leaseholders under FCA rules”.

Rights and information

Sheldon Mills, the FCA’s executive director of consumers and competition, said: “We want to give leaseholders more rights and the information they need to exercise them.

“Importantly, under our proposals those selling multi-occupancy insurance will have to act in leaseholders’ best interests.

“Our review revealed large commissions paid by some brokers to freeholders and third parties – like managing agent – with little evidence of any value added to justify these payments.

“We are taking action against these practices and we won’t hesitate to taker further action if brokers don’t comply with our rules.”

Devil in the detail

The FCA is now seeking responses to its proposals via an online consultation, which is currently open and will run until 9 June 2023.

Its first proposal is to bring in enhanced disclosure requirements for brokers that would require firms to provide a summary of the features of the policy.

This proposal was bolstered by a proposed new rule that would require firms to provide clear pricing information for leaseholders, including information on how the premium is made up and how much of this is based on commission.

The FCA also proposed that authorised insurance intermediaries disclose the total remuneration received for arranging the insurance, including any commission paid by insurers and any commission paid to property managing agents or freeholders.

Alongside rules on improved disclosure for leaseholders, the FCA suggested a selection of proposals intended to support product governance and customers’ best interests.

It proposed amendments to its rules that would expressly require firms to focus on the interests of all customers that receive a benefit from the insurance and have an obligation to pay towards the insurance costs, including leaseholders.

It added that any remuneration shared by firms with others in the distribution chain, such as property managing agents, would also need to be assessed in terms of fair value as these impact the price that customers, including leaseholders, pay.

Market support?

In a statement, Biba explained that it “supports the four changes the FCA wants to bring to the market to improve transparency for leaseholders”.

It explained: “Biba broadly welcomes the FCA’s announcement to give new rights and protections to leaseholders to improve transparency and disclosure within the multi-occupancy leasehold buildings insurance market.”

The broker body added that it would work with its members to enable full disclosure of information to leaseholders via the freeholders, but added that Biba members were already adjusting their practices to stop sharing of commission with property managing agents, freeholders and landlords.

Michael Sicsic, managing partner at compliance consultancy Sicsic Advisory, told Insurance Times that the FCA’s proposals “were big news for insurance brokers with big leaseholder property portfolios, but bigger news for the entire broking sector”.

He explained: “A number of interventions could change the fundamentals of brokers’ business models – firstly, this is the introduction of commission disclosure. Today, it is just for leaseholders, but it sets a precedent for intervention where the FCA finds harm.

“It is a warning about opaque supply chains and a reminder that all parts must be satisfied with the value of others.

“Insurance brokers should make no mistake – the FCA is serious about fair value and it didn’t like what it saw here.

”They should be reviewing all their remuneration arrangements for all products and ensuring that they can have the framework to assess and justify their part in the value chain to the regulator’s expected standards.”