Gove ‘outraged’ by broker leasehold commissions

Last week, the FCA published its report into 16 brokers, which found absolute levels of remuneration, including commissions, rose by nearly 40%, despite reductions in commission percentages, with average broker remuneration per policy rising from £2,170 in 2019 to £3,010 in 2022.

It also found that between 1 January 2019 and 30 September 2022, £80m of broker commissions were paid to third party firms.

FCA recommendations to government

Executive director, consumers and competition at the FCA, Sheldon Mills, wrote to Gove on Friday 21 April to outline the findings of his report and recommend next steps for the insurance industry and government.

He recommends the government:

• Consider imposing a legal requirement on freeholders and property managing agents to provide information on the insurance policy to leaseholders. This would ensure the information provided by insurers and brokers is passed on to leaseholders.
• Consider legislation applying directly to unregulated property managers and freeholders regarding their remuneration.

Gove outraged

In response to the FCA findings, Gove wrote to Rathi saying he was “outraged” at the report, and it “must not continue” in a scathing attack on brokers.

“You have found that broker remuneration has risen by nearly 40% in the last three years, with £80m of commissions are going to other parties – and that brokers are unable to provide any evidence to demonstrate that this represents fair value,” he wrote.

“Despite this, they are happy to load these unwarranted and opaque costs on innocent leaseholders. We must continue to shine a light on these unfair practices, and to improve the operation of this market. Leaseholders are being badly let down. This must not continue.”

He stated the findings in the FCA report strengthens his resolve to “ban property managing agents, landlords and freeholders taking commissions on buildings insurance and replace with transparent fees,” which he outlined in a previous letter to Rathi in January 2023.

Rathi had previously written an open letter to the market in January 2022, which Gove said the market had so far “disregarded.”

I expect insurers' pricing to reflect that reduction in risk. I would welcome a proposal from the FCA on how to guarantee the market is operating effectively in this respect, and to expose any who fail to meet our expectations.

Michael Gove

He said: “I see that the market has so far disregarded your open letter of January 2022, which made clear that leaseholder needs should already be a consideration. In that light, I welcome your intention, subject to consultation, to formalise the rights of leaseholders in a product's fair value assessment and ask that any resultant rules changes are implemented by the Autumn.”

He also wrote how he believes the FCA should “take immediate enforcement action” against those brokers and managing agents that cannot demonstrate their commissions represent fair value, where they are regulated by the FCA and by RICS.

He has asked Rathi to update him on what enforcement action the FCA has taken, and to clarify “how managing agents' behaviour will be directly addressed by the FCA” under Rathi’s powers by summer recess, which falls on 20 July 2023.

Gove explained how the risk in these multi-occupancy buildings decreased, yet the insurance premiums paid by leaseholders had increased over the past few years.

“In this context,” he said, “I expect insurers' pricing to reflect that reduction in risk. I would welcome a proposal from the FCA on how to guarantee the market is operating effectively in this respect, and to expose any who fail to meet our expectations.”

What is being done?

Mills wrote in his letter how the Association of British Insurers’ work to develop and launch a reinsurance scheme to provide reinsurance cover for those multi-occupancy buildings worst affected by cladding and other fire safety issues is ongoing, with a planned launch date of Summer 2023.

He said the FCA is urging the ABI to ensure this scheme is brought into operation “as soon as possible” and that it is delivered “in a way which maximises its impact and the benefits it brings to leaseholders”.

In February, the ABI and  British Insurance Brokers' Association launched a code on core risk data for multi-occupancy buildings higher than four storeys or 11 metres in height and affected by combustible cladding or other material fire risk issues. This was a recommendation set out in the FCA’s report from September 2022.

Mills wrote how after six months, the FCA is keen to see “how the code is working and to understand the insight it provides”.

Gove wrote in response: “More than six months have elapsed since your initial report was published, so I would be grateful for your confirmation that brokers and insurance firms are recording data as per the enhanced dataset, as well as what steps you will take if firms are not accurately recording this data.”

Gove finalised his letter by requesting a further report “no later than the end of October” with updates on insurer modelling of the risk, adoption of the ABI/Biba industry data standards and any changes in commissions and pricing of buildings insurance.