Before giving our input on the questions asked in the report, we set out our ongoing concerns and our views regarding the FCA’s historic lack of action in an area of housing that the government accepts impacts many of the 3.2 million leasehold flats in England.
We would like to thank our contacts across the insurance industry for their input to our understanding of these issues.
1/ LKP, together with the All Party Parliamentary Group on leasehold and commonhold reform, has repeatedly raised concerns with the FCA and the Financial Ombudsman about the issues relating to high commissions, poor levels of cover, limited rights of consumer redress, the lack of transparency in the market and the lack of effective regulatory oversight by the FCA. We welcome that the FCA report finally accepts there is a fundamental need for change.
2/ We remind the FCA that:
It has accepted that its 2005 report, F0057, contained a number of inaccurate submissions. These were used to support the claim that there may not be a problem with high commissions.
In its 2014 report, TR14/9 the FCA concluded that there were both unreasonably high commissions and conflicts of interests among the intermediaries in the market. However, it then appeared to take no action, or at least no action that resulted in market change.
https://www.fca.org.uk/publication/thematic-reviews/tr14-09.pdf
3/ We do not accept the assumptions in the report that seem to take on trust the insurance industry’s assertions, particularly regarding the lack of profitability on policy cover.
4/ There seems to be a lack of consideration of the structure of the market, including whether the existence of a small number of large landlords using block policies skews the costs for individual blocks needing cover. Many of these will be run by leaseholders through right to manage or residents’ management companies.
5/ The report does not appear to consider the methods used by the main insurance companies to segment the availability of their products to different parts of the market. We accept the FCA does acknowledge, at 4.21, that there is often a lack of choice in the market.
6/ It seems unclear whether the FCA has tested the evidence provided by the insurance companies and brokers. As with the passage of the Water Bill, the Association of British Insurers appears to have been allowed to provide data to the government or its regulator with no rights for other parties to scrutinise the data.
7/ We note the term “captive” is mentioned just twice in the report, with no detailed examination on the extent to which this may damage the market, or why the inevitable “offshore” nature of such systems is damaging to consumer transparency.
8/ We are unclear why the FCA accepts that increases in the level of water leak claims have any relationship to the increases in cover costs linked to building safety issues. Nor does there appear to be any relevant granular data demonstrating how claims levels on building safety related matters have increased. The table at page 38 shows the only significant increase in peril cover costs related to flood. This flood risk obviously only impacts a small subset of the leasehold stock. It does not explain the increased costs in the whole market. The tables at page 39 then talk about “commercial and industrial” ratios. It is not clear what the FCA intends by this analysis or if it is deemed analogous with the costs in the residential leasehold sector.
9/ We note the FCA does not appear to consider the insurance industry’s growing use of increased excesses to reduce, or eliminate, peril claims. Historically, the lenders would not allow any excess of above £1,000 on any peril. This policy dropped out of the Council of Mortgage Lenders handbook less than a decade ago. Since this time excesses seem to have jumped on many peril types.
10/ We do not accept the FCA has adequately reviewed the issues around pooled risk and the fact that the insurance industry has actively opposed a formalised pooled system since 2019. We do not accept that the FCA has considered how the insurance industry may be using an informal pooling system for individual policy cover to maximise profits.
11/ We consider the FCA’s decision not to engage with those outside the insurance industry, and its active decision not to ask for evidence of high premiums from consumers, were flawed. There is concern that the data provided to the FCA is therefore partial and some of the data seems considerably to understate the costs seen in the high-rise market.
12/ We obviously accept the FCA’s conclusions that unreasonably high levels of commissions are paid to landlords’ agents and brokers. We do not believe the FCA has gone far enough to explore the ways in which these parties seek to hide these commissions and to what extent they may be doing so in breach of existing FCA regulations.
13/ We do not accept the assertion that many managing agents are unregulated. Our understanding is that all managing agents dealing with high-rise buildings are FCA regulated. We note that, despite the APPG having raised concerns regarding the actions of certain regulated agents in the past, we are unaware of any relevant FCA enforcement action.
14/ We are concerned about the focus on the intermediaries, rather than the insurance companies. The insurance companies often decide how the market works and what commissions are allowed. We remain entirely unconvinced by the analysis in the report which concludes that the insurance companies are not making strong profits.
Q1: What additional information do you think would most benefit leaseholders?
This question is set out in the context of para 4.24 where the FCA suggests a number of options for consulting on improving transparency.
We accept all the FCA suggestions under this heading. We accept the proposals around all potential conflicts of interest that we would argue should extend to any soft or contingent payment and discounts related to the policy, specifically including those that may be linked to a wider block policy. There should also be the right for detailed disclosure of claims history by category type and any other information that might be needed to allow the leaseholders to independently test the market.
The report mentions ‘captives’ which we consider inevitably work to the consumer’s disadvantage in this sector. The FCA should consider whether such systems should be banned in this sector. At a minimum there should be an obligation to disclose all forms of captive relationship, be it with the managing agent, landlord, developer, or broker. If the FCA considers the use of captives in this sector is acceptable, we would urge that it works with the Property Tribunal to create a system that allows the tribunal to determine whether costs may be deemed unreasonable at all points in the insurance chain, including those that arise in the offshore market.
Q2: Do you have views on how this information should be provided to leaseholders?
A summary of insurance information should be provided with the electronic version of the service charge demand. More detailed information should be made available on demand as per the terms of extant leasehold legislation
Q3: Do you have views on how our rules should be amended to include leaseholders as customers?
We do not agree with the FCA’s view that most leaseholders should continue to be excluded from the ICOBS provisions. The argument for wanting to exclude leaseholders from ICOBS rights seems illogical as the subset of leaseholders who are deemed party to the policy already have ICOBS rights. We do not believe the provision of ICOBS rights will create the problem outlined by the FCA because these rights already apply to a subset of leaseholders, and those rights do not appear to cause any difficulties. Consumers should additionally have rights under the PROD rules.
Q4: Are there any potential unintended consequences we should consider if we include leaseholders as customers within our rules?
Any definition of the leaseholder as the customer must not transfer the liabilities of the landlord for arranging the policy onto the leaseholder nor should it give the leaseholder rights that might override the landlords’ obligations under the terms of the lease.
Q5: Do you have any views on whether we should prohibit authorised firms from paying remuneration to freeholders and unauthorised property managing agents?
It seems illogical that the FCA currently allows a regulated system with unregulated parties. This allows any regulated party to place payments via unregulated related parties and encourages the ever more complex and opaque system that has developed over the last two decades, to the consumers’ detriment. We would argue that for the insurance industry to be regulated properly all parties receiving any form of payment or benefits linked to a policy must also be regulated.
Q6: Do you have other views on potential remedies concerning remuneration set out in the report?
We remain concerned that the FCA has only focused on remuneration systems used by intermediaries. We believe the FCA must create systems that ensure greater transparency of insurance company costings and the mechanisms used by the insurance companies to control the supply of product.
There is currently no simple system to challenge costs. We believe the FCA needs to introduce a system that ensures transparency so that potentially unreasonable costs can easily be challenged.
Q7: Do you agree with the potential remedies we are not proposing to take forward?
We do not agree with the FCA view concerning the Financial Ombudsman Service. The FCA has been aware since at least 2012 that there is a major lacuna in the current regulatory system. Because most leaseholders are not deemed customers, they have no rights to use the FOS and in many instances that means some issues are outside the jurisdiction of the Property Tribunal, the Property Ombudsman and the FOS. We do not agree with FCA assertion that the FOS should not be used because they will not directly reduce costs. Currently most leaseholders have no right to raise a complaint about the actions of their landlord or insurance company in the way a claim is handled. We set out an example here where the FOS refused to consider a claim by the leaseholders that the landlord and insurance company had decided should not go forward.
Q8: Are there any other potential remedies we should consider?
The Pool Re: terrorism cover system has been in place for 30 years. Pool Re: now has an accumulated surplus of £6 billion. This system was changed recently to cover cyber attack (an issue not particularly relevant to residential premises). As such leaseholders are subsidising commercial businesses via their share of the historic surplus.
Flood Re: introduced in 2014 specifically excluded leasehold, partly because the ABI asserted at the time that it was not an issue they felt impacted leasehold homes. As the data in the FCA report shows, flood claims have increased considerably but without leaseholders having the protection of Flood Re:
We have argued since the end of 2018 that the government should consider a Building Safety Re: system. 5 years after Grenfell we have the lenders, the government, the surveyors, and the insurance industry all pulling in different directions. What is now an acceptable risk to a lender and surveyor under a PAS 9980 survey may still not be deemed an acceptable risk to an insurance company.
We must end the position where we may have fire officers demanding one set of changes to a building, a fire engineer and surveyor another set, the lender giving a third set of conditions and the insurance industry computer still saying no. Or rather, we must stop all of them changing their minds multiple times as has happened over the last 5 years. As we saw with the government’s disastrous Building Safety Advice Notes any single update creates multiple changes and a lack of stability in the market.
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Financial Ombudsman urged to look into leasehold insurance scams
Competition and Markets Authority relies on skimpy MORI poll of 1,050 for its report on leasehold management
Leasehold insurance: 17 years of FCA regulatory failure
Leaseholders pay up to 60% more for buildings insurance because of secret commissions, reports The Times
FirstPort jacks up accounting fees at St David’s Square by 80% … and then bodges accounts, leaving leaseholders overcharged by more than £17,500
