FCA flagged that leasehold insurance commissions were an issue in 2014 – but did not tackle them
FCA’s predecessor the FSA also took a look in 2005 and was unable to say “with certainty” that bad practices were not widespread (see report below)
The FSA 2005 report claimed that LEASE and the Leasehold Valuation Tribunal were aware of the problem and could provide no details or data (like a court case or two)
ARMA was contacted by FSA, which reported that the trade body was unaware of the practice of abuses in leasehold insurance
The conduct of the Financial Conduct Authority has received a devastating rebuke from Insurance Business magazine over its repeated inaction over leasehold insurance fiddles.
In particular, it reports that LKP, MPs and other leaseholders were aghast to see FCA officials dissembling before MPs of the Treasury Sub-Committee earlier this month.
Harriet Baldwin, Conservative MP for West Worcestershire and chair of the committee, asked Sheldon Mills, the FCA’s executive director, consumers and competition:
“The thing that struck me most about this consultation is that these absolutely egregious commissions that have surfaced in your market study have been going on under the nose of the FCA for, presumably, the entire lifetime of your organisation [ie since 2013]. Were you also shocked by what you found out about this market?”
Mr Mills replied that the FCA had been made aware of leaseholder complaints on rising insurance costs “just prior” to Michael Gove’s demanding an inquiry. The FCA executive director had been “surprised” to see such high commissions, MPs heard.
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LKP chair Martin Boyd described this comment as “unbelievable”, and has demanded a meeting over factually incorrect statements to MPs.
“The FCA has been appallingly weak on this issue, and they’re still showing a complete unwillingness to act dynamically,” Boyd said.
Sir Peter Bottomley MP, Father of the House, told Insurance Business he had been bringing up the “secret” commission issue in Parliament and with the FCA for 10 years.
“The experts, the regulators, the insurance companies all knew of this,” he said. “It was money for old rope for the in-crowd, and it was paying out a fortune unnecessarily for the masses.”
The FCA issued a statement to Insurance Business:
“We have worked quickly to draw up and consult on a package of important reforms that will give leaseholders greater rights and transparency in the multi-occupancy buildings insurance market.
“These rule changes include requiring insurance firms to act in leaseholders’ best interests and banning firms from recommending a policy based on the levels of commission or renumeration. We will act where firms are not following our rules.”
The Treasury Sub-Committee took place after the FCA’s review earlier this year found commission payments of more than £80 million paid to property managing agents and freeholders through insurance brokers from January 2019 to September 2022.
The FCA found that there was little evidence provided to show fair value, particularly where freeholders were pocketing sums. The taking of commissions by third parties is a practice that Gove has vowed to ban, to be replaced with a “more transparent” fee model.
Business Insurance also reports that LKP has supplied it with a redacted report by the FCA’s predecessor, the Financial Services Authority, in 2005. It can be read here:
It found “minimal evidence” of any concern regarding the potential for brokers and property managing agents to be overinflating charges, despite contact from multiple individuals and MPs.
But the FSA said that it was unable to state “with certainty” that bad practices in the leasehold sector were not widespread.
Leaseholders will note with wry amusement that the 2005 report claimed that LEASE and the Leasehold Valuation Tribunal were aware of the problem but could provide no details or data (like a court case or two). See para 23
The Association of Residential Managing Agents was also contacted by FSA, and claimed it was unaware of the practice of abuses in leasehold insurance.
Related posts:
Michael Gove: Is this the robust inquiry into leasehold insurance fiddles that you wanted from the FCA?
FCA finds ‘significant shortcomings’ in leasehold insurance. While Michael Gove urges it to look further
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Gove calls on complacent FCA to stop the leasehold insurance rip-offs, and urges the CMA to get stuck in as well
Leasehold insurance: 17 years of FCA regulatory failure
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I suggest that the FCA, ARMA, IRPM and others; open lines of dialogue with Right to Manage Company’s, most can demonstrate in detail with past and present invoices for the same service charge cost headers, precisely where we have been charged undeclared fee’s, commissions and other mark ups. This includes past building insurance in this instance.
To the best of my knowledge and belief the former managing agents service charge demand contained hidden cost and fees on almost every cost header, the proof of this is a reduction in service charge of 39.43% in only sixteen months or £ 936 + per annum per apartment and their is plenty more where that came from.
I believe that it is common knowledge (thanks to LKP and many others) that Freeholders and MA have been charging egregious commissions for building insurance for several Years, etc, etc, etc.
We continue to adhere to the terms and conditions of the Lease with regard to the premises both internally and externally.
Sadly there have not been “many others”. If there had we might have got here a lot sooner. We exposed the commissions with your ex LL many years ago but very few took action at the time.
How can leaseholders find out if their Landlord is receiving a commission on their Insurance Policies..
We are in Social Housing and our landlord assures me that no commission is received from Zurich Municipal Insurance on the Buildings and contents policies, the cost of which is included in our Service Charge. At present I have accepted the Landlords word on this.
Dear Mr Hollands,
Request to see a copy of the building insurance certificate, it is a summary document showing the usual details, start date, end date, what is covered, what is not covered and the excess. The most important element is the cost for the cover. Then simply compare that cost with what you have been told or what you are paying.
If you notice a difference between the actual cost and what you have been told then ask you Landlord for a written explanation for the variance.
If you Landlord insists they receive no commission for said insurance simply ask if their Managing Agents does, and do they pass it onto the Landlord including their Fee, Commission or other improvised cost?
I hope this reply may be of some use
We have the building insurance placed with zurich who receive no commission. however both the broker and Homeground receive their commissions.
Michael
If you want to send me your email to hendersonjacqueline1@sky.com im happy to send you details of my buildings/terrorism/engineering insurance and all the commissions.
Stephen
I have just had a look at the single sheet Zurich Policy statement on our Notice Board.
It is only for Buildings and Third Party, we have to organise our own contents.
It states the details of the policy as you have listed, but no indication of the cost of the Policy.
Surely if a Landlord was receiving commission he would not want to disclose that information.
I would imagine if commissions are paid they would be the subject of a credit invoice from the insurance company to the landlord, An invoice which would be quickly hidden away and never disclosed to the leaseholders. I am not suggesting that has happened in our case.
Michael,
I have a copy of this residential apartment blocks “Residential Flats Insurance” policy in front of me, it is a nine page document and contains the information previously mentioned and more. Page one of the document clearly shows the “Total Annual Premium Due” which includes IPT rate 12%. We have posted the first four pages to the Company notice board for all to see, and the Development Manager has a full copy in the office which is available to all residents should they wish to see it, take copies or photograph.
I suggest you request to see a full copy of your residential schedule which must include the total annual premium due and all other details. A one page insurance document is not satisfactory in my opinion you need access to the full document summary, which might include sections covering 1. Insured Property, 2. Terrorism, 3. Liability to others, 4. Employers liability, 5. Machinery breakdown and 6. Legal Expense Insurance.
The previous MA charged us or would of charged us £ 6,138.00 had we not gone RTM, we currently pay £ 3,911.50 up to the Year ending 23/03/2024.
I believe that the former and present levels of insurance cover provided are the same, but the current cost is clearly substantially less, I wonder why? According to one former area manager “the service charge has to go up every Year because XYZ has to make a profit”
Stephen
Thanks for all this information it is much appreciated. I hope it proves useful to other readers as well.
Looking into this further it appears that our Social Landlord takes out out a Buildings policy with Zurich Insurance for all of his around 57000 properties as a Group Policy.
The same as they do for Gas and Electricity supply and many other services.
On the company website there are full details of the cover and conditions, but of course no mention of the cost of the policy.
The Landlord will then arbitrarily divide the total cost among all the different complexes, How he does that we shall never know. We are attributed £12230.12 for the complete complex which equals £197.26 per flat. That may well be a reasonable charge and we have the Landlords reassurance that there is no commission.
But of course we have no proof.
Michael,
The total insurance premium for this residential apartment block is £ 3,911.50 per annum, divided by twenty one apartments equals £ 186.26 for each home paid by way of the annual service charge.
I believe that your insurance provider will either have had to visit your complex to conduct an assessment, or the managing agent may complete a prescribed form on their behalf. Once those assessments are completed it is a relatively straight forward task to apportion costs accurately and may include the number of homes in the various complex’s in those calculations.
I am by no means an expert on property insurance so can only go off my own experience.
Thanks Stephen
If you are happy with your Insurance charges then I suppose our is going to be reasonable at £11.00 more.
We have two communal lounges, a kitchen, library, hobby room, a small gym, a Mamager Office, a Carers Office, a communal bathroom and a Guest Flat.
Michael,
The Managing Agent of our choice namely Home Management Group Limited, achieved a substantially reduced insurance cost for our home when compared to the former MA last proposed service charge budget.
According to the information that you have posted your Landlord has a “Blanket” policy for around 57,000 (fifty seven thousand homes).
I would reasonably expect through the economy’s of scale that your Landlord would achieve better in return for the cost of each unit (for your home) than we have.
I have only limited knowledge in the insurance market and stand to be corrected by those better qualified than I.
I suggest that you continue to ask questions! My experience of “economy of scale” suggests to me that you are paying to much, we achieved a better insurance cost for twenty one apartments than others insuring around seventy five thousand, how can that be?
Stephen
Thanks for all the information you have provided. Let’s hope it will encourage others to look at their Insurance costs.
I agree with Stephen Burns. We completed an RTM a couple of years ago. The first thinhg we tackled was the insurance, reducing the premium from £21K to £7k PA. The saving of 66% was gobsmacking and in the first year of operation the RTM finished with a decent surplus towards a sink fund. Every aspect, from the previous management, has been a cost saving exercise, and we now have a rolling maintenance programme rather than a 7 yearly section 20. The previous management were just rip off merchants. Everything they did they levied at least an 8% charge for themselves, because the lease said they could. The leases need to be tackeled to prevent this. All fees should be transparent.
I completely agree with Bryan Harris, I can think of no other Industry’s that operate in the same or similar way to the Freehold or the Leasehold sector. I believe the Freehold & Leasehold sector is largely unregulated and not effectively Policed, and many on the receiving end are systematically exploited on an Industrial scale.
In my opinion the Leasehold & Freehold sector should of been abolished many years ago and be replaced with Commonhold for those that wish to adopt it,
The present system is ineffective and not fit for purpose and belongs in history’s dust bin, so the sooner this current shambles is dealt with the better because their are a growing number of Industry insiders as well as Leaseholders who are “”sick to the back teeth” with the current situation, and want change.
Interesting reading. I’m constantly baffled by the annual rise in our building insurance premiums. Up 11% this year. 6 flats in a block and £403.00. I’d love to know if there’s a commission somewhere but when asked been told there isn’t. we never claim either.
2020 £267, 2021 £294 2022 £377 2923 £403
Is that about right?
Many thanks, Neil.
Neil,
Are you a Leaseholder? If you are then simply go Right to Manage. The following are just a few financial and other highlights that were achieved in about sixteen Months.
1. Service charge reduced by – 39.43% compared to the former MA last proposed service
charge, achieved in sixteen Months only.
2. Reserve fund increased substantial.
3. Achieved an Electric & Water refund for over payment of £ 9,829.78
4. Electric usage this bill 961 KwH this period last Year 1,845 KwH saving 884 KwH per
Month.
5. We pay 5% VAT on communal electricity not 20%.
6. Recently purchased a Defibrillator plus training and certificates for DM and two others
7. New “dry ridge roofing system on the entire Apartment block roof, due to water ingress
9. Replaced two decayed roof extraction ducting vents before they fell off the roof (Video to
prove).
10. Employed a City & Guilds gardener to bring the communal gardens to there full
potential, which he has.
I could go on but think that we make our point, so much for the Professional Freeholder. We treat this apartment block as our Home and not a financial asset and major income stream which can be exploited to the full.