The Financial Conduct Authority (FCA) published a review and consultation on the proposed changes, including its findings on practices in the market.
In its consultation paper, the regulator proposed defining leaseholders as customers of buildings insurance, as currently, just freeholders are considered customers. It also wants insurance firms to design products with leaseholders in mind and stop firms from recommending policies based on commission or remuneration.
The FCA also wants insurance and brokers to give more detailed and transparent information about policies and the remuneration along the distribution chain.
Significant rise in broker payments
The FCA’s review found that the average commission paid to brokers for every policy rose by 46 per cent to £2,595 from 2019 to 2022. Over the same period, the average remuneration rose by 39 per cent to £3,010.
The average gross written premium (GWP) per policy increased by 56 per cent to £11,625. The average broker commission accounted for 20 per cent of this rise.
In total, the GWP rose by 82 per cent to £305.1m, the overall broker remuneration increased by 55 per cent to £75.6m and the total gross commission saw a 64 per cent jump to £65.7m.
Some £80m in commission was paid to other parties, such as the building’s freeholder or property managing agent.
The FCA said this indicated a significant rise in remuneration and commission paid. However, the average rates of remuneration and commission as a proportion of GWP fell over the period.
The regulator continued that it did not see a need for additional specific rules around broker remuneration aside from those proposed, as well as the rules in place under Product Intervention and Product Governance Sourcebook (PROD) and Consumer Duty.
The FCA said it expects brokers to immediately stop paying commissions to third parties, such as managing agents and freeholders, unless they can justify and provide evidence to show this gives fair value.
Separately, the Department for Levelling Up, Housing and Communities (DLUHC) said it would ban the payment or sharing of insurance commissions with property managing agents, landlords and freeholders. The FCA said it would work with the government to ensure this is done and would change FCA rules if needed.
Limited transparency for leaseholders
The FCA found that the 16 brokers in its sample, who account for 35 per cent of the market, did not provide sufficient evidence that they consistently delivered fair value. This was due a lack of assessment, analysis of costs and inadequate scrutiny of the commission paid.
When brokers did disclose information to customers, it was often found to be appropriate but limited or generic with little information about the roles of other parties in the chain and the remuneration.
Some brokers gave leaseholders this information on request while others refused, saying this would only be shared with the freeholder who is their customer.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “We want to give leaseholders more rights and the information they need to exercise them. Importantly, under our proposals those selling multi-occupancy insurance will have to act in leaseholders’ best interests.
“Our review revealed large commissions paid by some brokers to freeholders and third parties, like managing agents, with little evidence of any value added to justify these payments. We are taking action against these practices and we won’t hesitate to take further action if brokers don’t comply with our rules.”
Gove ‘outrage’
Michael Gove, Secretary of State for Levelling Up, told the FCA he was “outraged” by its findings in a letter to the regulator.
He said the lack of evidence behind the commissions paid to third parties was “unfair” and leaseholders were “being badly let down”.
Gove said the findings strengthened the need to ban third parties from receiving commission and welcomed the proposed formalisation of considering leaseholder rights in product design.
He said action should be taken against the brokers and managing agents who could not demonstrate the fair value of the commission paid, and asked for an update on the consequences to be published by Summer Recess.
Gove also said data recorded needed to be improved, as this hindered the FCA’s review, and said he expected insurance costs to come down due to the reduced risk of multi-occupancy buildings following remediation works.
He asked for the FCA’s final report to be published no later than October.
Gove also wrote to the British Insurance Brokers’ Association (BIBA) telling them the practices were “completely unacceptable” and “failing consumers”.
He asked BIBA to evidence how its members would stop “inflated” broker commissions and “unjustifiable” payments made to third parties.
