Government grills FCA on broker commission

Sheldon Mills, executive director, consumers and competition at the FCA, told a Treasury select committee hearing on Wednesday that he “was personally surprised at the level of some of the largest commissions” uncovered by a report by the regulator.

The FCA report found that broker remuneration had risen by nearly 40% in the last three years, with £80m of commissions going to third parties.

In the report, the FCA found that commission levels had varied from between less than 10% to a maximum of 62% in one case.

When pushed by Eagle to name the firm that claimed 62% commission, Mills said it would be “inappropriate” to name them.

In a separate Treasury select committee hearing, Johnny Timpson, of the Financial Services Consumer Panel, said he felt the market average of 16% to 32% commission on buildings insurance was “a better benchmark” for the amount brokers get paid.

His comment was criticised by Eagle, who said: “A 16% to 32% commission on any insurance product taken out on a building is what you thought was appropriate, given that we now know that at the moment it’s as high as 62% – 16% to 32% is still a hell of a lot of cost for an insurance premium that has doubled, tripled, and quadrupled in the last few years.

“My inbox is full of people who live in flats, some of whom will live in sheltered housing, who’ve had their service charges massively increased, even when they’re on fixed incomes. And you think that 16% to 32% of the cost of that is a fair price for providing?”

She labelled the buildings insurance sector as a market that is “more interested in attracting the people that distribute the product, rather than caring about the customer that’s actually paying”.

Transparency

As part of the FCA’s report, it put forward recommendations to the Department for Levelling Up, Housing and Communities, including improved transparency for the leaseholder.

Matt Brewis, director of general insurance at the FCA, explained: “Our requirement on brokers to provide information to the leaseholders means they will see how many quotes have been received, what the price differentials are between them, how much has been paid, as pay aways to the freeholder, how much has been taken as commission by the broker, all of which gives the leaseholder the ability to challenge the cost.”

Brewis, Mills and Timpson all referred to the FCA’s imminent Consumer Duty rules when questions on how to ensure all parties are acting in the best interest of the end customer, the leaseholder, who will ultimately be paying the premium.

Mills said: “I don’t think what’s happening currently is fair to leaseholders, or if I haven’t made that clear, it’s not fair. That’s why I think that our proposal should help.”

Timpson said: “We have the Consumer Duty, which is implementing at the end of this month. It will actually refocus the responsibilities of senior managers to emphasise improved customer understanding, transparency, improved customer service, improved customer vulnerability support.

“I think we’re in a far better place than we were.”

Tougher on brokers

The panel questioned Mills, Brewis and Timpson about why insurance premiums for buildings had increased as much as they had, with cladding and other fire risks coming out as the main reason post-Grenfell.

The FCA is currently working with the Association of British Insurers on a risk pooling scheme to share the risk and bring down premiums.

Brewis said of premiums: “I do think premiums will go down, but I don’t think they will go down to pre-Grenfell rates.”

This was because of the increased cost of fixing issues and inflation.

But when it was due to commissions, Mills said the FCA does need to be “tougher on brokers”.

He said: “The measures that we have put out to get this pooling scheme working, which the ABI is taking forward, would bring down some of the base level costs.

“We do need to be tougher on the brokers. I hope we have been clear. There is no explanation for a 62% commission. There needs to be a reduction in these commissions, that’s clear. And there needs to be a proper explanation of the work that brokers are doing, because every penny counts for these leaseholders.”

When asked if there could be more action taken against brokers found to be acting out, Mills said the FCA’s current focus is getting the market “functioning”.

However, he did add that if the FCA and Competitions and Markets Authority were to work more together, they could have powers to take more significant action.