By Harry Scoffin
The ruling Conservative party was kicking back at brokers and freeholders over insurance kickbacks and commissions as early as 2006, Leasehold Knowledge Partnership can reveal, with RICS and FCA predecessor, the FSA, agreeing there was a problem.
Ex cabinet ministers Gregory Barker, then shadow environment minister, and Theresa Villiers, then shadow chief secretary to the Treasury, joined forces in Parliament to bombard government ministers and officials throughout 2006 with pointed questions motivated by concerns that ordinary homeowners were paying sizeable commissions – blended into their buildings insurance premiums by way of landlord-controlled service charges – under the controversial leasehold system.
Leaseholders ‘losing millions from bribes’ to renew insurance
Secret commissions are being paid to property agents behind leaseholders’ backs, with undisclosed payments from insurance brokers said to run into “hundreds of millions of pounds”.Sir Peter Bottomley, a Conservative MP and co-chairman of a parliamentary group looking into leasehold reform, warned th
Today’s flat owners in the vastly expanded leasehold sector in England and Wales are estimated to be losing hundreds of millions of pounds to the practice.
Leaseholders pay up to 60% more for buildings insurance because of secret commissions, reports The Times – Leasehold Knowledge Partnership
By Harry Scoffin The property section of The Times has this month been leading on calls to end opaque insurance arrangements for leasehold blocks. In a sign of how leasehold is now dominating the news agenda, the title’s investment editor Mark Atherton has published on the issue of secret commissions over two consecutive Saturdays.
Estates Gazette blows the whistle, gets Tory support and forces FSA into a corner
In June 2006, Estates Gazette reported that the consumer issue “appealed to David Cameron’s reborn Conservatives” with Ms Villiers becoming “involved following a two-year campaign led by Peter Rochford, the co-founder of the South East Leaseholders Commonholders and Homeowners Association (SELCHA) based in Hastings, East Sussex, which represents 180 groups of leaseholders”.
The Tory frontbench team also agreed to take up the then nascent scandal on the basis of Estates Gazette’s campaigning journalism involving exposés of the bribes and commissions in leasehold buildings insurance and hard-hitting editorial pieces, an agenda which even won praise from the traditionally pro-landlord RICS.
“It is good it has come up, and we’ll fight to have absolute clarity and transparency,” said then RICS president-elect Graham Chase.
“People who don’t have a transparent position on what they are charging are bringing the entire industry into disrepute.”
A year after the Financial Services Authority, which became the FCA in 2013, issued a press release refusing an inquiry into leasehold buildings insurance in spite of letters from MPs and members of the public providing concrete examples of overcharging, the regulator was being backed into a corner by the Estates Gazette’s relentless reporting of the commissions scandal showing “40-100% costs on top of the real cost of insuring the block”.
While admitting to the property magazine “there is an issue around buildings insurance because the premiums are charged to the leaseholder and yet the policyholder is the freeholder”, the FSA justified its non-interventionist approach through a spokesperson who said “at the end of the day we work on a cost/benefit basis and we don’t want to add extra costs by way of extra regulation if we can possibly help it.”
The FSA then proceeded to make the extraordinary claim that leaseholders had no wish to know the detail of the charges that they are paying:
“We had a long consultation period before the new rules came into practice last January. The overriding reason for not making it compulsory to declare retail commissions was that research we carried out with customers showed they were not interested in commission levels, so long as the overall cost was low enough.”
On Tuesday, the Financial Conduct Authority sent an 8-page letter to Levelling-Up Secretary Michael Gove (below) listing a series of “potential harms” to leasehold consumers in this market, noting that “freeholders, property managing agents and insurance brokers may be selecting insurance policies that maximise their own remuneration (i.e. any commission or fees they receive), rather than the policy that offers the best value for the leaseholders”.
The FCA, however, cautioned:
“Any such intervention would be significant, with potential for adverse unintended consequences, and would require a strong justification in order to meet our statutory objectives … if our work finds that price increases are a legitimate reflection of increased risk it is unlikely we will wish to intervene”.
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The UK’s financial regulator has warned that “significant” intervention might be required to tackle the soaring cost of insurance for leaseholders in high-rise buildings in the wake of the Grenfell Tower tragedy.
Managing agent forces Tchenguiz to cut commission by 40% in Canary Wharf and RICS issues confused report quoting anonymous tribunal judge poo-pooing the scandal
In 2005, Estates Gazette broke the story of a managing agent having persuaded billionaire freehold tycoon Vincent Tchenguiz to rein in the insurance commission at one of his developments near Canary Wharf by 40%, a situation it found unusual since “the reason that managing agents don’t normally complain is, of course, that they can benefit from a split in the commission or in some cases take the lot if they have their own FSA-regulated ‘captive’ insurance broker. Ask around, and many will admit to large sums of money being made for doing very little.”
For an offshore captive reinsurance in action, see the Rendall & Rittner case uncovered by LKP last year:
The Estates Gazette pressure would force RICS to eventually confront the consumer rip-off, although its 2010 review, which has since been taken offline and is today being given a re-airing by LKP (below), cited an unnamed member of the tribunal to suggest that leaseholders are often mistaken when suspecting significant buildings insurance commissions.
Speaking to LKP, Peter Bill, the surveyor-turned-journalist and former editor of Estates Gazette who led the charge on these issues in the late 2000s, says:
“Transparency is the key, as I said in 2008. Obfuscation, foot dragging and limp ‘codes of practice’ do nothing to protect leaseholders from being ripped off. It is the often-stated duty of the RICS to protect the public. For decades they have chosen to protect their members’ lucrative income from secret commissions.”
Lucy Barnard, then the intrepid features editor for Estates Gazette who did a series of articles on the leaseholder insurance question, says:
“I started writing about this issue back in 2006. If anything, since the Grenfell disaster, the situation for leaseholders appears to be worse, with still very little compulsion to provide transparency to leaseholders for what can be rapidly increasing premiums.”
Despite three Conservative prime ministers committed to extending the property-owning democracy and persistent calls for a crackdown on commissions and other anti-consumer practices in buildings insurance as leasehold dwellings have proliferated across the country, no law has been changed to protect leaseholders nor has regulator Financial Conduct Authority, the successor to the FSA, adjusted its ICOBS rules to mandate insurer and broker disclosure of commissions and other remuneration data to the paying flat owners, many of whom are not the policyholder for their freehold-owning landlords have the right to place the policy.
The heavily trailed Leasehold and Commonhold Reform Bill, which could have dealt with insurance, was omitted from the Queen’s Speech on Wednesday.
Villiers and Barker: calling off the dogs on freeholders and their professional acolytes?
The issue of a tax wheeze in leasehold buildings insurance was also raised by leasehold campaigners, with SELCHA’s Mr Rochford claiming in 2006 that once the real insurance premium had been paid, some brokers, landlords and managing agents were sending the rest of the money to offshore bank accounts to split among themselves, thereby ensuring neither freeholder nor managing agent would have to pay tax on the earnings.
“These are secret fees which are not registered for VAT, insurance premium tax or corporation tax. They stay invisible to the people who pay them. Neither the broker, the insurance company nor the managing agent will tell anyone how much the basic premium actually is. And it’s happening all over the industry,” he explained to Estates Gazette.
Gregory Barker, the former climate change minister and Tory “Lord” today gaining controversy through media depictions as a lobbyist for the sanctioned pro-Kremlin Russian oligarch Oleg Deripaska, tabled more than 10 parliamentary questions on secret profits in leasehold buildings insurance as the fresh-faced shadow environment secretary, less than a year into David Cameron’s decade-long Tory leadership.
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The Conservative peer Greg Barker has resigned as chairman of EN+, the mining company part-owned by the sanctioned Russian oligarch Oleg Deripaska. Lord Barker, an energy minister in David Cameron’s government, oversaw a plan to help the firm respond to US government sanctions levelled against the company and Deripaska in 2018, when it sanctioned the oligarch over his alleged links to the Russian government.
The then MP for Bexhill and Battle was uncompromising on the rent-seeking in this area.
In one parliamentary question, he challenged then chancellor Gordon Brown on what representations he had received regarding concerns about “money laundering through landlords use of the insurance premium tax system”. In another, which may similarly cause wry amusement among Private Eye fans, Lord Barker of Battle, as he is now called, demanded to know the number of “insurance intermediary companies”, i.e. brokers, being investigated by government for “fraud”.
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As reported by LKP last year, there has been a role reversal by Ms Villiers, too, who went on to protect the interests she once attacked as a young, conscientious shadow minister:
An implacable critic of her government’s decision to ban ground rents on new leases, the law for which comes into effect next month, Ms Villiers has since 2015 enjoyed £11,000 in donations flowing into local party coffers from Monte Properties Limited and Lazari Investments Limited, companies that fall under the Lazari Family Trust, of the property-developing dynasty led by the late Cypriot-born billionaire freeholder Christos Lazari and which in 2017 was ranked by Property Week as London’s 32nd biggest landowner.
There is no suggestion that these donations have influenced Ms Villier’s changed approach to leasehold reform in recent years, including her decision to file seven pro-freeholder parliamentary questions in October.
Labour demands response over Theresa Villiers’s meeting with lobbyist
Labour has called for the immediate publication of a letter by the cabinet secretary, Sir Jeremy Heywood, which is expected to indicate whether the Northern Ireland secretary, Theresa Villiers, broke the ministerial code by failing to declare a meeting with a lobbyist.
A far cry from her early days as an MP campaigning against leaseholder exploitation, in January Ms Villiers joined the only other Tory rebel, Sir Desmond Swayne, to protest the Leasehold Reform (Ground Rent) Bill, telling the Commons:
“As drafted, the Bill will see professional freeholders exit the market. It is disappointing that the Government have not responded to the calls on Second Reading to consider an exception in the Bill to enable ground rents to continue to be an option for large, complex apartment blocks. If we remove the choice to use ground rents for buildings of that kind, all the responsibility for ensuring the safety and long-term viability of the block will fall on leaseholders. That will inevitably lead to higher costs, since individual residents groups will not have access to the kind of specialist expertise and collective buying power that professional freeholders have when they buy in services to repair, maintain and enhance buildings.
“… Put simply, there is a reason why English land law has deployed the concept of a freehold interest for the past 900 years. It makes sense for someone to have stewardship of the long-term future of a building, and it makes sense for their economic interests to be aligned with maintaining the building and investing in it for the long term.”
The investment asset class in the freeholds to people’s homes that Ms Villiers alludes to was strongly criticised in an Estates Gazette editorial dated 3 June 2006 which said that low profit margins in managing agents was not “an adequate excuse for retaining a monopolistic, opaque and what is rumoured to be a very profitable business for insurers, freeholders and managing agents.”
The leader continued:
“Last year, the Financial Services Authority [FCA predecessor] began to regulate insurance services in the property industry. After some fuss, the RICS was granted the right to become the surrogate regulator. Here are a couple of questions for the former: has the FSA any idea of the annual premium and commission income on block insurance and does it feel the profits being made are reasonable? Does it ask regulated property insurance brokers to declare commissions on their financial reports? If not, why not?
“And a couple of more philosophical questions for the RICS: is it right for a freeholder to retain the absolute right to determine the insurer? Is there not a conflict of interest between managing agents [and freeholders] receiving commissions on insurance and representing the best interests of flat owners?”
Last month, LKP revealed that the FSA had conducted an internal review of leasehold buildings insurance in 2005 but chose not to progress to a full investigation on the basis of a trade body, ARMA, not having data to evidence consumer detriment.
The decision by the FSA not to launch an inquiry into secret commissions involved in the insuring of multi-occupancy residential blocks in England and Wales was made despite the regulator concluding as part of its preliminary research that while “the practice of artificially inflating buildings insurance may still be prevalent in the market, it may go largely unreported” because English “property law is structured so that leaseholders are unable to choose their own building insurance policy” and since they are often not classified as the legal policyholder, the paying flat owners do not qualify for disclosure to see by how much they are being overcharged.
RICS uses unnamed tribunal judge to undermine commissions debate in now-deleted 2010 report
In the same way the FSA appeared to have used ARMA, a lobby group for managing agents and freeholders, and its lack of data as cover for not investigating further into the leasehold buildings insurance commissions scandal, RICS makes reference to a tribunal member’s personal opinion, muddying the waters, in its most recent research into this area.
The 2010 RICS report, “Transparency in professional fees”, which despite being removed from the organisation’s website LKP is making publicly available today (below), observes:
“A response to the consultation, from someone who sits on the LVT, highlighted that in many cases allegations of unreasonable fees and commissions were unfounded when all the information was looked at. If the information had been made available to the leaseholder from the start then they may not have decided to go to the LVT. However, the fact they did and then had a decision go against them can only go to damage the relationship between the agent and the leaseholder.”
LKP has confirmed that this tribunal member was making representations to the RICS as a private citizen.
Bizarrely, in a response to an FOI request, the tribunal service confirmed that it felt there was no need at the time for it to submit a response to the preliminary FSA inquiry:
“I can confirm that with regard to the FSA report on Insurance, the FSA cleared with RPTS, the release of that section in the report recording our view. At the time of the reports preparation in 2005, we canvassed the RPTS Management Board and our Panel Offices about their experiences with LVT cases and informed the FSA that ‘We have no evidence of a particular problem and so have no comment to make in connection with your review’.
“In the matter of the RICS report, we were aware of the consultation, but as an organisation made no response to it.”
Estates Gazette reporting around that time showed the tribunal system was already being overwhelmed by cases concerning leasehold buildings insurance and uncapped, often secret, commissions to freeholders and managing agents. In a Estates Gazette long read, “No premium put on transparency”, dated 10 June 2006, Lucy Bernard rattled off a list of significant tribunal cases:
“Hard evidence from Leasehold Valuation Tribunal cases
“In 2004, Rother District Investments, the landlord for Marine Court, St Leonards-on-Sea, East Sussex, admitted that between 2003 and 2004 it had sent a total of £16,823 of commissions on insurance premiums to a company called Chase Longman (Jersey) Ltd. The LVT ordered Rother to pay the offshored money back to tenants. In 2004, KFT Investments Ltd, the freeholder of 5 Embassy Court, Portsmouth Road, Surbiton, Surrey, also admitted to sending monies from insurance commissions offshore to Jersey.
“In two cases – Camberley, Beaconsfield Road, West Bromwich in May 2005 and 79-81 High Street, Canvey Island, Essex – the landlord, the insurance broker and the managing agent were all part of the Hercules group of companies. In a decision on 6 April 2005 regarding the Essex case, the LVT said the managing agent’s fees “were not a matter for scrutiny by the landlord, but a source of profit for the Hercules Group”. The same was found, with a different company, in March 2003 at 78 Sweyn Road, Cliftonville in Kent.
“The LVT has also ruled in many cases that charges for insurance premiums were “excessive”. In the case of Audley Road, Hendon, NW4, which came before the London LVT in February 2006, the tribunal reduced the landlord’s claim for insurance from £2,911.59 to £1,000 on the grounds that BLR, part of the Erinaceous Group, had left the insurance “entirely in the hands of the brokers” and had taken no steps to ensure that the lessees got the best value for money. There are also a number of cases where insurance premiums were again called into question, after it emerged that the valuers, insurance brokers and managing agent involved were all firms within the same group of companies.”
This is not the first time that a member of the judiciary has opined on leasehold and commonhold reform in a way potentially benefitting the sector, with Sir Terence Etherton, then the Master of the Rolls, a hugely influential, establishment position, publicly cautioning the government against banning leasehold houses in 2016:
In March, Robert Bryant-Pearson, a former FTT surveyor judge, wrote an article that appeared to lobby against a mass shift to commonhold, saying “as the flaws of leasehold are being fixed by the 2022 Act and subsequent reforms, why ditch it for a new form of tenure, the nuances and consequences of which are untried and untested?”
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RICS goes south?
Ms Bernard’s 2006 Estates Gazette feature also quoted the colourful leasehold professional and former LEASE chair, Roger Southham, who struck a pro-consumer pose:
“At the risk of sounding moralistic, I for one feel that managing agents should earn their money. They should not seek to profiteer from mark-ups to the detriment of providing a service.
“The real problem is that the vagaries of the insurance market allow landlords and agents to manipulate matters to get the income they want. I have come across some brokers who will “make” the premium whatever the agent wants it to be. As long as the insurers get their share, they are happy to add on whatever figure is desired by the landlord or agent.
“… For a very long time, commissions have been the best way to make money out of owning residential ground rents. In some cases, this is even being factored in when sale prices for ground rents are calculated. There is an argument that high levels of commission are needed to compensate for the work undertaken in dealing with the policy and the handling of claims. But this is a complete red herring. Invariably, the freeholder will try and keep the commission and not pass it on to the agent. This means the agent has to handle the insurance matters within their normal fee.”
Mr Southam was engaged by RICS to help it investigate leasehold buildings insurance.
In 2016, however, LKP reported that Mr Southam, while chair of the government quango meant to help leaseholders, had his managing agent company, Chainbow, refund leasehold homeowners at one site £1,760 in wrongly levied insurance commissions.