And again, 11 April 2022:
The Financial Conduct Authority (annual budget: £632 million) is doing the least it can possibly get away with in response to Communities Secretary Michael Gove’s instruction that it investigate leasehold insurance fiddling, LKP believes.
Our criticisms, based on scrutinising the FCA’s badly drafted and spineless questionnaire to the insurance sector (below), echoes those made by Sir Peter Bottomley – along with Labour MP Justin Madders and LibDem leader Sir Ed Davey, a patron of our organisation – to Insurance Times yesterday.
“There ought to be criminal prosecutions for any insurance company or intermediary that continues with a system where residential leaseholders pay excess premiums for insurance on buildings they do not own,” said Sir Peter.
“Every kickback, commission and douceur should be either stopped or declared. Second, the Competition and Markets Authority with the FCA should say to people that if the level of commission is unreasonable, you should expect to pay penalty fines when a case is upheld.”
His strong language is repeated by Sarah Olney, LibDem MP for Richmond Park, who publicly wrote – in a joint letter with LibDem councillor and Tower Hamlets mayoral candidate Rabina Khan and Lord (Dick) Newby – and to the Competition and Markets Authority this week (below).
LKP’s criticisms concern the FCA questionnaire to insurance brokers which does not ask any questions about the fundamental point: that is, commissions paid to landlords. Or “bribes”, as Sarah Olney prefers to call them.
There are no questions about offshore insurance captive companies, either. Owning one of these was Rendall and Rittner’s justification for its statement that that it “did not accept commissions for insurance”. No, it just owned an offshore captive routinely making a 40% profit on premiums:
Muddled questions – Q7a and Q7b – mix up commissions paid to managing agents and to freeholders, yet the FCA has known since 2005 that the prime problem with leasehold insurance is the commissions paid to freehold-owning landlords.
Further questions concern commissions paid to the insurance broker, which is absolutely not the point of the exercise.
The questions concerning problems in obtaining insurance on buildings caught up in the building safety crisis are very limited. There are no questions about the potential impact of the ICOBS rules.
Finally, the FCA asks for responses by May 18, which ignores Mr Gove’s three-month deadline issued on January 28.
Mr Gove said:
“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 … My overall goal is for there to be a more affordable marketplace for buildings insurance that offers widely available and affordable cover for those who live in flats and other multiple-occupancy buildings.”
LKP has told the co-chairs of the All-Party Parliamentary Group on leasehold and commonhold reform that there is very little prospect of that given the FCA’s efforts. We have very little confidence that it is making any genuine effort to discover the level of problems in the leasehold insurance market.
Meanwhile, Sarah Olney, the LibDem MP for Richmond Park, has sent a letter to the Competition and Markets Authorioty (annual budget: £91 million), which is doing excellent work over the mis-selling of homes with aggressive ground rents.
Ms Olney dismisses euphemisms such as “commissions”, “distribution costs”, “facilitation fees” in favour of the word “bribes”, and the key person to bribe is the freehold owning landlord:
“In a block of residential flats, it is the freeholder (often, with his property managing agent) who is the person whose judgment needs to be influenced and whose position is prone to being influenced by reason that the costs of insurance does not come from his pocket but his leaseholders. The insurer and their broker are motivated to secure a sale and are in a position to wield influence over the freeholder.
“All parties undoubtedly are aware that the ultimate person paying for the cost of insurance is the leaseholder. Yet, the leaseholder is the only party in the chain who is denied access to know the true cost of the insurance policy. Instead, what the leaseholder is asked to pay is a bundled price known as the ‘premium’. This amalgam, more often than not, includes a deal sweetener benefitting solely the freeholder and property managing agent, not the leaseholder.”
Paying and receiving “facilitation fees”, argues Ms Olney, “acculturates a rent-seeking mindset in society”.
“The system is self-sustaining because to be the first insurer to opt-out of paying ‘facilitation fees’ would render that insurer uncompetitive in the market place,” says Ms Olney.
She tells the CMA, which really ought to forward it on to the FCA:
“Weak governance and weak institutions lead to corrupt practices and ineffective competition in the markets. More than before, the UK needs to stand as a sovereign state possessing credible and robust institutions, especially in the financial sector. The governance and ethical practices of insurance companies and property managing agents has already been questionable for over a decade.”
Like LKP, Ms Olney noted the contribution of James Dalton, director of general insurance policy at the Association of British Insurers, to the Levelling Up, Housing and Communities select committee.
Mr Dalton told MPs:
“One of the significant costs in the price of insurance is commission and if we are going to do anything to reduce the costs that fall on leaseholders, all things need to be on the table. And my submission to you is that commission and distribution should be one of them.”
James Dalton to Select committee
FCA survey can be read here:
Sarah Olney MP letter to CMA can be read here:
Related posts:
Gove calls on complacent FCA to stop the leasehold insurance rip-offs, and urges the CMA to get stuck in as well
Financial Conduct Authority under pressure to force open secretive insurance commissions, so leaseholders can see what they are paying for
Insurance insiders call for an end to secretive leasehold insurance commissions following Canary Riverside ruling
OFT leasehold management inquiry includes housing associations and council properties – and will report in September
Rendall and Rittner … no insurance commissions, but it owns an offshore ‘captive’ insurance company making a 40% profit on leaseholders’ premiums
Retirement housebuilder Platinum Skies breached shared ownership rules with onerous ‘staircasing’ charges in the lease
I am fairly new to leasehold but I understood commissions from insurance came to the residents? I got this from the RICS Codes of Practice:
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5.19 Remuneration, including commissions
Leaseholders should be notified annually of any remuneration, commission and other
source of income and related income or other benefits received by the landlord or the
managing agent (see section 6.7) in connection with the placing or managing of
insurance (see section 12.6), or the provision or procurement of services or utilities.
Any commissions, fee income or remuneration of any sort received by a landlord should
be offset against the costs recoverable as service charges, unless the landlord is able to
demonstrate that the remuneration is in return for a service, the cost of which would
otherwise be recoverable as a service charge. Any service provided by the landlord
should be supported by a service level agreement or contract.
The amount or value of the income should be declared annually with the year-end
service charge accounts/summary of expenditure, and should be proportional to the
value of the service provided.
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Are we saying the act of obtaining the insurance is the service that is carried out which the commission pays for, and that is why the landlord gets it and not the leaseholders.?
Thank you Simon for citing details from the RICS Codes of Practice. I hadn’t realised that RICS addresses this issue; but I will be following this up. In particular I need to find out if my landlord or his managing agent subscribes to these Codes.
Meantime, it seems to me that costs incurred in obtaining insurance should come out of the managing agent’s annual management fee. And there lies another can of worms!
Does this extend to councils who are landlords?