FCA sets out potential reforms to multi-occupancy buildings insurance market

The Financial Conduct Authority (FCA) this week (21 September) published a set of potential interventions it could make to reform the multi-occupancy buildings market and ensure leaseholders were better protected.

In its report, the FCA suggested that it could increase the amount and transparency of information available to leaseholders on the pricing of the insurance they are paying for, make it easier for leaseholders to challenge high insurance costs passed on to them and make leaseholders customers of buildings insurance.

The report also suggested the creation of a “cross-industry pool” to limit the risk to individual insurers posed by buildings affected by flammable cladding and attempt to reduce the price of insurance for these buildings.

This report represents the culmination of work the regulator has done with the industry to collect data and information since January this year, when ex-secretary for levelling up, housing and communities Michael Gove ordered an inquiry into the buildings insurance market because of concerns around “unfair service fees” being charged to leaseholders.

The FCA found that “there has been a reduction in the supply of insurance for multi-occupancy residential buildings between 2016 and 2021, with some insurers leaving the market and a reduced appetite to take on new business”.

Unfair practices

Insurance Times has previously reported on disputes between leaseholders and freeholders, brokers and insurers at two Canary Wharf-based properties owned by billionaire property magnate, Yiannakis ‘John’ Christodoulou – One West India Quay and Canary Riverside.

Leaseholders and renters in multioccupancy buildings are beholden to their freeholders, who place buildings insurance themselves or via a property managing agent.

The problem the FCA identified is that leaseholders have no ability to procure their own buildings cover or even view the policy by which they are being insured because they are not defined as the customer according to property laws – insurance policies are sold to freeholders, providing no recourse to information for the leaseholders the insurance is meant to provide cover to.

This arrangement allows freeholders or their agents to agree higher premiums for cover – benefitting an insurer and allowing brokers to take a larger service fee that can then be cut back to the freeholder as a commission.

Freeholders can then charge their leaseholders for the insurance policy via service fees, meaning that leaseholders pay for the higher fees indirectly but remain unable to make decisions around cover.

Making leaseholders the customers of buildings insurance – as suggested in the FCA’s report – would remedy this issue, as would making it easier for leaseholders to challenge high insurance costs passed on to them.

The FCA explained that it would provide an update on progress towards potential remedies in six months.

A better approach?

In a statement, Biba said that it welcomed the FCA’s report on insurance for multi-occupancy buildings and the “comprehensive engagement by the FCA with [its] members over the last few months in gathering information to help write the report”.

The broker trade body explained: “Biba fully supports [the recommendations around greater transparency for leaseholders].

“We consulted with our members earlier in the summer and agreed that we would encourage freeholders and property managing agents to present clear information to leaseholders about the insurance related work they undertake, the value they add to the supply chain and their contributions to the cost of the insured placement.”

Biba also broadly welcomed the regulator’s recommendation that leaseholders be treated as customers, but said it believed a “better approach would be to treat leaseholders as ‘partial beneficiaries’ to the insurance contract under existing FCA rules and supplement this with the disclosure and transparency requirements outlined”.

However, the trade body said that limiting or preventing the arrangement by which commissions are shared by brokers with property managing agents and freeholders could “bring unintended consequences”.

It explained: “For example, if property managing agents cannot continue to be remunerated through rebated commission, then it is possible that either the service charge to leaseholders may increase as managing agents/freeholders look to their only other source of income or, being nothing more than a cost burden to them, they may lose interest in their involvement in the insurance arrangement of the properties.

“This could result in insurers not getting the answers they need and premiums being affected because of a perceived deterioration in risk.”

In a letter published in May (10 May 2022), the FCA suggested that it would consider introducing rules to limit commissions for multioccupancy buildings insurance – it did not suggest that it would stop the practice entirely.