Insurance insiders have signalled their disapproval of secretive, leasehold buildings insurance commissions, as Levelling-Up Secretary Michael Gove calls in the Financial Conduct Authority and the Competition and Markets Authority to investigate the practices.
They welcomed a property tribunal decision last month ordering Manchester insurance broker Reich Insurance Group to hand over a spreadsheet detailing any commissions or broker fees paid by leaseholders at prime site Canary Riverside, in London’s Docklands.
That needed to be done by March 17.
Reich had been engaged by Canary Riverside Estate Management (CREM) and Octagon Overseas Limited – both companies are under the ownership of Monaco-based property billionaire John Christodoulou.
The disclosure order came from the First-tier Tribunal (FTT) of the Property Chamber following two and a half years of litigation between leaseholders at the Canary Wharf-located apartments and Mr Christodoulou.
Mr Christodoulou’s CREM and Octagon were stripped of direct management responsibilities for Canary Riverside back in 2016 following the FTT’s decision to appoint an independent, section 24 manager for the site, but the companies managed to wrest back control of buildings and terrorism insurance a year later.
In March 2020, the leaseholders successfully fought off an attempt by Mr Christodoulou to stop them from challenging the service charges they had paid for buildings and terrorism insurance for the years 2010/11 to 2015/16 inclusive.
It was argued at tribunal that the leaseholders had tacitly endorsed the sums by either not withholding service charges at the time – a tactic LKP never advises since it exposes leaseholders to the landlord’s legal costs and forfeiture proceedings – paying them under protest or mentioning that they were unreasonable as part of their section 24 bid.
James Dart, managing director of Dart Compliance, told Insurance Times last week that it was “interesting” that it had taken over two years for the FTT to force from Reich the disclosure of commissions at Canary Riverside.
He added: “One result from the case and the government ordered inquiry could be to give leaseholders the right to receive commission details, where commissions are paid to third parties by the broker.
“What is clear is that practices such as this do nothing to reinstate customer trust in the industry, which is still low due to the Covid-19 business interruption claim situation.”
Branko Bjelobaba, principal at compliance consultancy Branko, said: “The FCA and the government want to see fairness and transparency in this sector. If larger brokers are pushing for greater commissions to allow a very generous split with property managing agents, then this is wrong and insurers must stop this egregious practice.”
One industry insider, who spoke on condition of anonymity, told Insurance Age that “it has always amazed me how little time the FCA have dedicated to reviewing the fairness of the commission levels and kickbacks that the parties in the chain receive. Virtually all the costs are passed down to the [leasehold] tenants at the bottom of the chain, who, as a ‘retail customer’ usually have no idea of what they are paying or how it’s made up. While I appreciate they are not directly party to the contract, surely they [the residential leaseholders] are still the end consumer, so how can that be fair value or honest disclosure?”
The Financial Conduct Authority has been getting pretty handy with its ‘Dear CEO’ letters lately. They are being issued at such a rate that brokers and insurers risk becoming snow-blind in the blizzard of paper. The watchdog’s latest target? The residential property owners’ market.
In a statement to Insurance Times, Reich chief executive Simon Taylor said:
“Reich Group is of course fully committed to complying with the FTT’s order in providing the required information, as we will with any court ruling. As a business, we are only ever interested in adhering completely to the rulings of any legal authority and, of course, to our regulator, the FCA.”
The tribunal order against Reich came against the backdrop of hardening political and public sentiment towards leasehold insurers and brokers who have thrived on exploiting the ‘captive’ position of leasehold flat owners: they pay for the insurance but are not party to the contract and have no say over its payment terms.
However, there is no suggestion that either Reich or the Yianis Group client have made secret profits from buildings and terrorism insurance.
The Yianis Group said that it didn’t in a written statement dated 28 August 2020, after which the leaseholders turned their focus towards Reich.
Judge Timothy Powell, regional judge of London’s first-tier tribunal property chamber, wrote to Reich on 23 November 2021, saying that it “did not comply” with an earlier tribunal disclosure order that had been handed down the month before, on September 29.
According to a tribunal decision made earlier this month, Judge Powell took issue with the response Reich supplied on November 1, consisting of a single one-page witness statement by Nick Symes, Reich director of property insurance.
It categorically ruled out any commission or remuneration at Canary Riverside “either from the Respondents [Yianis Group interests] or from any party acting on behalf of the Respondents for the years 2013 to 2019 inclusive”.
The finding by Judge Powell that Reich had not complied with his disclosure order was then “disputed by Reich in a letter from its solicitor dated 17 December 2021 in which Reich requested the opportunity to make submissions before the tribunal agreed to widen the scope of the disclosure required from it,” continued the ruling of 1 March 2022.
But the FTT was concerned at apparent contradictions, however.
In an order issued on 29 September 2021, Judge Amran Vance writes:
“In summary, in this case the Applicants [the residential leaseholders at Canary Riverside] were initially informed, in August 2020, that the Respondents [Mr Christodoulou’s CREM and Octagon] were not aware of any other insurance related income, other than brokers’ fees, received either [sic] Reich. That statement was then qualified, on 13 November 2020, to say that Reich received commissions on the global insurance policies placed on behalf of the Yianis Group of companies, estimated to be an average of £28,725.38 per year for years 2013 – 2019 across all of the CREM policies (inclusive of broker fees) of £201,077.”
In that decision, the FTT felt it appropriate to make a Rule 20(1)(b) order “requiring Reich to answer questions in respect of the contents of the email of 13 November 2020”.
The third party order was justified by Judge Vance on the basis that he “for the first time, had sight” of the leaseholders’ statement of case dated 18 December 2020, which had got lost in the tribunal system, where they “refer to a hearing before the Tribunal on 2 March 2017, when, they say, oral evidence given on behalf of Reich, that it received commissions of approximately £50,000 per year in respect of the [Canary Riverside] Estate.”
Judge Vance’s decision for the FTT continued:
“Given the asserted disparity between that oral evidence and the contents of the 13 November 2020 email, I consider clarification from Reich as to the commissions received, and disclosure of the class of documents referred to, is desirable to assist in the fair disposal of this dispute … I [also] consider that in order to properly advance [the leaseholders’] case they are entitled to receive an explanation as to how Reich arrive at the estimate of £28,725.38 and what proportion of that sum concerns the [Canary Riverside] Estate.”
Unfortunately for both the FTT, a self-styled expert jurisdiction for resolving leasehold disputes in a low-cost and timely manner, and the Canary Riverside leaseholders, the order was unintentionally drafted in the wrong way, which had assumed that Reich would have been the party taking commissions from the Yianis Group landlord companies, and not paying them out.
Such is the opacity of leasehold buildings insurance, this phrasing allowed Reich to come back and say it had received not a penny in commission or other related fees for buildings and terrorism insurance from Yianis Group landlord companies at the Canary Riverside estate, adding further delays to a case that was already disrupted by the coronavirus pandemic.
Unlike in the case of home contents insurance, most flat-owning leaseholders are not the policyholder when it comes to buildings and terrorism insurance and must therefore accept whatever policy is secured by the freehold owner who controls the management of the block.
This means that when leaseholders request a breakdown of the insurance premiums being billed to them they are rebuffed by insurers and brokers, who argue that they are not the customer.
In emails seen by LKP, this appears to be the situation at West India Quay, Canary Riverside’s sister estate, where leaseholders have been told by the same broker, Reich, that they are not the policyholder and therefore do not have a right to “the net cost of the premium and of any commission or other payment made on top of this … such confidential remuneration information”.
The Financial Conduct Authority does not require its regulated entities to disclose any commissions or remuneration to the service charge-paying residential leaseholders in its ICOBS rules:
Canary Riverside has been the scene of repeated leasehold litigation, in which insurance costs have featured as an issue.
In 2017, Mr Christodoulou successfully persuaded the tribunal to take responsibility for buildings and terrorism insurance out of the hands of the independent section 24 manager and return it to his companies on the basis that his bank would otherwise pull his loans on Canary Riverside.
The leaseholders claim that this had the effect of undermining section 24 management by gifting control of one of the biggest ticket items on the service charges to Mr Christodoulou’s companies.
On January 28 this year, Secretary of State Michael Gove wrote to the chief executives of the Financial Conduct Authority and the Competition and Markets Authority ordering them to launch a joint probe into leasehold buildings insurance.
“The market lacks transparency and there is not currently useful data to explain the rationale behind the increasing premiums charged by insurers and the conditions associated with the cover. The role and remuneration of brokers, managing agents and freeholders is also unclear.”
What followed was one of the famous “Dear CEO” letters from the FCA, in which chief executive Nikhil Rathi insisted insurers and brokers must treat leaseholders as “retail customers”, irrespective of whether the flat owners control the policy:
“Insurance intermediaries must ensure they do not adversely impact the value of products they offer. When considering fair value, firms should consider the freehold property owner and the freehold property owner’s duties to leaseholders and others. This is especially important as most leaseholders pay for buildings insurance through service charges and cannot shop around to find the best deals.
“Our rules require insurance intermediaries (such as brokers and property managers) to ensure they do not adversely impact the value of products they are offering. A key part of this is ensuring the commission they receive has a reasonable relationship to the benefits their services provide and the costs they incur in providing services.
“If the customer requests further details (such as the amount of commission) this should be provided … Where remuneration is adversely impacting the value of a product, or leading to conflicts of interests, the remuneration arrangements must be changed.”
The Dear CEO letter on buildings insurance is significant for it opens the door to FCA enforcement action against insurers and brokers baking commissions into the premiums residential leaseholders are paying without their informed consent.
“A ‘Dear CEO’ letter is a regulatory tool,” explains Mike Cranny, director of compliance firm Create Solutions, in comments to Insurance Age. “It is quite a strong thing – it is a warning … With a ‘Dear CEO’ letter, we look at every line of it. They [the FCA] write these letters so when they come to visit anyone, they can say ‘we wrote to you about this’ and then they’ve got them for non-compliance”.
But the FTT hasn’t been won over by the intervention, which earlier this month in the Canary Riverside case suggested the Dear CEO letter holds no legal weight and determined that it has no relevance to estates where, like at Canary Riverside, the service charge-paying residential leaseholders are still not the policyholder or customer in the traditional sense and do not agree the contract.
Canary Riverside FTT insurance decisions:
Financial Conduct Authority chief executive Nikhil Rathi writes to insurers and brokers on leasehold buildings insurance stressing need to account for fair value and transparency to leaseholders as “retail customers”, 28 January 2022