Back in September 2022 the FCA published a report setting out trends they had identified in the multi-occupancy building insurance market following the Grenfell tragedy of 2017. The review was carried out as a result of the noticeable increase in the cost of buildings insurance to residential leaseholders. Key findings of the FCA included:
- The increases in absolute commission earned by brokers, freeholders and property managing agents may be disproportionate to increases in service costs.
- Leaseholders are not customers in FCA rules or in insurance contracts – so are not automatically entitled to the same protections.
- There is an ongoing lack of transparency and disclosure for leaseholders from both the insurance and property sectors.
The FCA decided to conduct further analysis of the issues highlighted; consult on any necessary rule changes to address the harms identified; and review the activities of brokers receiving higher rates of commission. On 21 April 2023, the FCA published its further findings in a second report and at the same time published a Consultation Paper CP23/8 on multi-occupancy building insurance.
What is the consultation looking at?
The consultation is seeking views on new obligations, including more stringent disclosure rules, particularly in relation to distribution chains and commission sharing. This is because the April 2023 report found: “It is common for significant amounts of broker commission to be shared with these parties, particularly property managing agents and freeholders. The amounts of commission shared with these parties rose during the review period in line with the increases in broker remuneration and commission.”
The direction of travel is pretty clear: the government is opposed to the continuing practice of the payment of chunky and unjustifiable commissions by insurers, which are shared with landlords and property managers where no apparent benefit is passed on to occupiers. The FCA needs to put new rules in place to address this concern, particularly as the quantum of commissions can be sizeable, and seems to be increasing.
By changing the rules, the FCA wants to ensure that:
- The interests of leaseholders are properly considered when insurers design their insurance products.
- Prices for insurance represent fair value to leaseholders as well as freeholders.
- Remuneration of all parties involved in insurance distribution, including any payment of commission, bears a fair relationship to the benefits provided to leaseholders.
- Leaseholders have sufficient information to challenge poor practices and unfair costs passed on to them.
Who does the consultation affect?
The new rules will potentially impact any party in the insurance chain regulated by the FCA. In the real estate arena, this will be relevant for all regulated investors and landlords, as well as managing agents, who are obliged to obtain or are involved in arranging insurance for multi-occupancy buildings. If you are currently receiving any portion of insurance commissions, you will be particularly affected by these proposed changes.
What are the key dates?
- Responses to the consultation are due by 9 June 2023.
- The FCA intends to publish a policy statement in Q3 2023 together with its final rules.
- Implementation of the rules is expected to be three months after they are made, so the new regime should be in place by January 2024.
How can we help?
We can advise you on your response to the consultation; the potential impact of the proposals on your business; and any required restructuring of your existing arrangements for placing insurance, to make sure they are compliant with the new rules.
Watch this space for further developments in this area. We will provide further updates on the responses to the consultation, and the publication of the FCA’s policy statement later this year.
Authored by Stella Bliss and Ingrid Stables.