Is this going to be the third tokenistic inquiry after the feeble efforts in 2005 and 2014?
By Harry Scoffin
Failure properly to investigate leasehold buildings insurance could hammer the reputation of the Financial Services Authority the regulator warned its staff in 2005, the Leasehold Knowledge Partnership can reveal.
In a 2005 document seen by LKP, the financial watchdog – renamed the Financial Conduct Authority in 2013 – admitted that a scandal concerning buildings’ insurance in England’s multi-occupancy residential blocks could be in gestation.
It acknowledged that while “the practice of artificially inflating buildings insurance may still be prevalent in the market, it may go largely unreported” since flat owners have no rights to find out what is going on and acquire information where they are not the policyholder.
However, the regulator chose not to conduct a full investigation following its internal provisional study, which LKP publishes today.
The FCA decision not to take the 2005 leasehold buildings insurance project further came despite the regulator’s own admission that it “needs to take an active decision about how it is to take forward this piece of work” and recognition that “property law is structured so that leaseholders are unable to choose their own building insurance policy … there is a wide scope for intermediaries to over-inflate building insurance premiums due to the structure of the market”.
The report also stressed the benefits of enlisting the Office of the Deputy Prime Minister, then headed by John Prescott, and the Office of Fair Trading (OFT) since “a fully integrated approach should ensure that all aspects of consumer protection are covered by those that are in a position to initiate change in this area”.
Owners of leasehold flats are paying up to double the market rate for buildings insurance because brokers are paying “kickbacks” to the property agents who manage their homes. In a bid to secure business, some brokers are choosing the insurer that pays the most commission, instead of the company that offers the best value – and then sharing this commission with the managing agent.
The disclosure of the report threatens to embarrass a lavishly funded regulator (annual budget: £632 million) that has been repeatedly criticised for its decades-long refusal to tackle a secret commissions insurance scandal understood to involve “hundreds of millions of pounds” in leaseholder overcharging.
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
Levelling-Up Secretary Michael Gove ordered the FCA and the Competition and Markets Authority to investigate leasehold insurance fiddling after a wave of price-gouging evidence at sites affected by the post-Grenfell building safety scandal.
While praising the involvement of the CMA (annual budget: £91 million), LKP is critical of the feeble remit adopted by the FCA:
FCA versus CMA
The FCA’s uninterest in protecting leaseholders as consumers compares unfavourably to the work being done by the CMA. It has extracted voluntary undertakings from leading property developers and freehold investors, from Taylor Wimpey and Persimmon to Aviva and Adriatic Land 3 Limited, to scrap toxic, doubling ground rent and the RPI replacement clauses the sector dreamed up as a financially comfortable alternative to them. This applied to existing leases and leasehold owners of houses were to be given the freeholds to their homes at heavily discounted rates. The CMA has delivered these outcomes for tens of thousands of consumers up and down the country despite having a modest annual budget of £91 million and far few powers than the FCA.
Freeholders and managing agents are overcharging leaseholders for the insurance of their flats, while also pocketing large commissions from the insurers. Campaigners for leasehold reform are calling on the government to crack down on the practice. Sir Peter Bottomley MP, the co-chairman of the Al
In 2014, after its market study into managing agents in the leasehold sector, the CMA urged the FCA to close the loophole that allows freeholders to control leasehold buildings insurance without declaring any commissions or remuneration to the paying leaseholders, a practice that can only take place with the cooperation of FCA-regulated insurers and brokers. (By contrast, the statutory RICS code mandates property managing agents to declare the same, where they are involved in placing the policy, offering some protection to leaseholders in these cases.)
But the FCA rebuffed the CMA, although the two organisations are now being forced to work with each other by Levelling-Up Secretary Michael Gove as part of a joint probe into leasehold buildings insurance launched in January.
Campaigners for leasehold reform are calling on regulators and trade bodies to take action against freeholders and managing agents who overcharge for buildings insurance and hide commissions and other payments. Times Money reported last week that many leaseholders are being overcharged
The FCA’s CMA snub of 2014 and decision not to toughen its own ICOBS rules came after the City watchdog noted in a thematic review earlier that year the conflict of interests that characterise leasehold buildings insurance and the uncapped and unjustified levels of commissions being reaped due to the consumer, the leaseholders, being locked out of the market and unable to strike deals for their developments:
“High levels of commissions noted where the end cost is borne by other parties. Certain lines of insurance (notably commercial property, residential property owners and landlords) consistently attracted very high rates of commission (generally over 35% and sometimes over 50%) given the relative lack of complexity in broking such products (which were frequently placed with a single provider or small panel).
“Some of the intermediaries and insurers we spoke to expressed concerns that these commission rates exist because the customer buying the insurance product was not the business or individual ultimately bearing the cost of the product. This appears to result in some intermediaries and property owners sharing in high commission levels with the inflated costs (and any potential detriment) being borne by the underlying tenant or lessor [sic, lessee]. There is currently a Competition and Markets Authority case under way considering residential property management services, which may partially consider this issue as it affects residential properties.”
ARMA and FoPRA disassociate themselves from 2005 FCA report … was it fabricated?
According to a less redacted version of the 2005 restricted report (also enclosed), the FCA, then operating under the Financial Services Authority (FSA) name, said that it had engaged the Association of Residential Managing Agents (ARMA) and the Federation of Private Residents Association (FoPRA) as part of its preliminary review into the issues which determined there was “no evidence” that brokers and freeholders were exploiting the captive position of leasehold consumers to bake sizable commissions into the premiums the homeowners were paying for buildings insurance by way of service charges.
In a press release, they repeat the claim that ARMA and FoPRA had no evidence of bribes and kickbacks in leasehold buildings insurance as reason for the regulator not continuing the investigation.
ARMA denies being consulted, telling LKP “the text appears to be either inaccurate or taken out of context, probably similarly for the F[o]PRA” and that it had “no record of contributing to this report”. ARMA says it only found out about the project when the trade body was contacted under freedom of information laws by the FCA itself, after the work had been completed.
FoPRA has confirmed to LKP that it did not participate.
The report said:
“Our discussions with trade bodies revealed although LEASE and the Leaseholder Valuation Tribunal were aware of the problem, they could not provide us with any specific statistics and they could not provide us with any evidence that this practice has occurred since the FSA became responsible for the regulation of the general insurance market. We also contacted the Federation of Private Residents Association and the Association of Residential Management Agents (ARMA) who claimed to be unaware of this practice. Citizens Advice have no details on this area and Trading Standards have been asked to provide us with information in this regard, but have not yet responded to our request.
The report worries that MPs will write to “Clive”: a reference to Clive Briualt, the ex-FSA’s retail market managing director who left the organisation following the Northern Rock disaster, with a golden handshake of £528,952 as the British economy teetered on the edge of collapse.
The body with responsibility for overseeing banks in the UK on Wednesday announced the departure of the head of retail banking as part of a wider restructuring of its senior management team following last year’s collapse of Northern Rock.
The regulator eventually rebranded as the Financial Conduct Authority, in 2013, following widespread criticism that it had failed to take corporate wrongdoing seriously with a light-touch approach to regulating the banks in the years prior to the sector’s collapse and subsequent government bailout.
The press release that accompanied the restricted FSA report, which LKP is also making publicly available, boasted of its famous laissez faire style to policing the commercial world to deny further work on leasehold buildings insurance:
“Given our findings, we have concluded that, as a proportional and risk-based regulator, it would not be appropriate for us to undertake further general work in this area.”
In its “filtering group” restricted report, the FSA noted that leaseholders of flats affected by buildings insurance issues had a right to escalate grievances to it and also accepted the regulator’s own ICOBS rules were irrelevant in cases where the homeowners pay for the policy but have to rely on their freeholder landlord or managing agent to place it and are not defined in the contract or their leases as the “policyholder”, a common leasehold arrangement:
“As stated at the start of this paper, in the case of leasehold flats, the freeholder, or his appointed property managing agent, usually decides which buildings insurance contract to purchase. Property law then allows the freeholder to claim reimbursement for the cost of the building insurance from the leaseholders. This market structure may mean that leaseholders do not realise, either independently or as a collective group, that they may have rights under FSA rules and principles to complain about practices of insurance intermediaries.
“If leaseholders are not considered to be the legal policy holder, their rights to information under ICOB about the level of premium, fees and commission relating to that contract are very limited. This means that leaseholders may not have access to details about how much intermediaries are inflating the cost of their building insurance policies. Without access to policy charges information, leaseholders may not be in a position to know whether they have a valid right to complain.”
“Although there is a wide scope for intermediaries to over inflate building insurance premiums due to the structure of the market, our initial findings indicate that incidences of this nature have not been widely reported to the industry bodies we contacted. We currently have no evidence that this practice has occurred since the FSA took over regulation of the general insurance market.”
The candid analysis begs the question as to why the regulator sat on the report and refrained from even tweaking its ICOBs rules to capture leaseholders in an improved definition of customer.
Nowhere to hide
Repeated leasehold scandals and 17 years would have to pass for the FCA to take action and, even then, it is only doing so because of ministerial diktat from the prime minister’s “Mr Fix-It”, Secretary of State Michael Gove.
The sale of the freehold of the block of flats where I live sparked a six-year battle over the simple right to choose insurance for our homes. We’ve had to fight off expensive lawyers, face judges in the Royal Courts of Justice and lodge a second challenge, but last month we finally won the right to stop our freeholder controlling our buildings insurance and overcharging us for it.
LKP’s release of its copy of the 2005 FCA Restricted report No 0057, “Buildings Insurance – Levels of premiums charged to leaseholders”, comes as pressure mounts on the FCA to fully grasp the scale of overcharging of leaseholders in buildings insurance and the structural imbalances in the market, and commit to meaningful regulatory changes to protect these captive consumers from financial detriment and emotional distress by the actions of insurers, brokers, freeholders and managing agents who are abusing their monopolistic positions.
Regulators are facing demands to investigate hidden commissions paid to freeholders of flats after homeowners saw their buildings insurance premiums hiked by 400 per cent. The dramatic rise in insurance costs rubs “salt in sore wounds” for hundreds of thousands of residents trapped in potentially unsafe homes that they can’t sell due to fire safety defects discovered in the wake of the Grenfell Tower tragedy, the Liberal Democrats have said.
Earlier this month, LKP revealed a tepid and poorly worded FCA questionnaire for brokers, which it has sent out following orders from the Levelling-Up Secretary Mr Gove to conduct a far-reaching probe to help government respond to spiralling post-Grenfell premiums and establish “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.”
This approach to data gathering and dealing with issues as thorny as these ones was actually criticised by the FCA, also in its 2005 restricted report on leasehold buildings insurance:
“In practice, it may be difficult to obtain all the relevant information we nay [sic] need from a questionnaire. Firm visits could be a more productive way of obtaining information from these firms.”
It appears the FCA is currently doing the bare minimum on the secret commissions scandal.
The regulator has so far ruled out engaging all stakeholders, including leaseholders, the consumers affected by uncapped and rising commissions being sneaked into their building insurance premiums, instead preferring to speak to those accused of partaking in the wrongdoing.
LKP chair Martin Boyd, in comments to Insurance Times, has criticised the FCA’s softly approach, saying:
“What is happening is that the FCA is planning to have a cosy chat, telling [insurance firms] to be more transparent on who is earning the money.
“In [its] heart of hearts, [the regulator knows] what the game is and that is the insurance companies work in a world where there [is] a soft commission, contingent commissions or offshore captives. The insurance industry has turned a blind eye to this.”
On Wednesday, Father of the House of Commons Sir Peter Bottomley, a patron of LKP, appealed to the FCA to “quickly produce” its leasehold buildings insurance report and ensure “that all commissions, rebates and douceurs—sweeteners—paid by brokers or insurance companies and received by managing agents or landlords are disclosed. That ought to be out in the open.”
“For too long, too many people have got rich on the back of residential leaseholders,” he added.
The intervention came after the senior Conservative politician tabled a parliamentary motion calling on the FCA to mandate “its regulated entities to disclose to residential leaseholders all commissions, remuneration, other fees and excessive costs associated with property insurance premiums paid by the leaseholders”, while urging government “to make sure leaseholders are given details without having to apply for the information or to go to the tribunal”.
The early day motion has secured support from a number of influential MPs, including self-proclaimed commonhold supporter and long-serving housing select committee member Bob Blackman; former shadow chancellor John McDonnell; and Sarah Olney, the LibDem who last month co-authored a hard-hitting letter to the outgoing CMA chief executive Dr Andrea Coscelli in which she and her party colleagues, Lord (Dick) Newby and councillor Rabina Khan, decried the “deal sweetener benefitting solely the freeholder and property managing agent, not the leaseholder” in buildings insurance.
Speaking as part of an online policy conference held by the Westminster Business Forum, Brewis set out what the FCA’s priorities are in the wake of Covid-19. Chief among these was ensuring that You are currently unable to print this content. Please contact [email protected] to find out more.
On Thursday, insurance insiders heard from the FCA’s director of general insurance and conduct specialists Matt Brewis at the Westminster Business Forum that the regulator had been collecting data over the past few months that would feed into its final recommendations on leasehold buildings insurance.
“We’ve been working closely with the ABI [Association of British Insurers], [the Department for Levelling Up, Housing and Communities] and firms, both insurers and brokers, and other parts of the market to get a good understanding of this issue,” he said.
“It’s an incredibly important issue for thousands of leaseholders across the country. And we’ll be publishing a report setting out our analysis and recommendations before the summer.”
Leaseholders are sceptical, still.