FCA to hit brokers with fresh leasehold insurance reforms from 2024

From 1 January 2024, insurance firms will be forced to act in leaseholders’ best interests, treat leaseholders as customers when designing products, and will be banned from recommending an insurance policy based on commission or remuneration levels.

Insurers will also be required to ensure their insurance policies provide fair value to leaseholders and provide important information about their policy and its pricing, including the detail of any commission paid for leaseholders.

FCA review

The reforms come after the FCA rolled out its flagship regulatory framework, the Consumer Duty, and following a review it carried out around broker leasehold commissions.

The review found that leasehold buildings insurance premiums had risen significantly since the Grenfell tragedy, with leaseholders facing substantially higher costs and poor value.

It also discovered £80.7m of broker commissions for multi-occupancy buildings was passed on to third parties in less than four years.

Our reforms will help to strengthen the insurance market by providing new protections for leaseholders.

Sheldon Mills, FCA

The Department for Levelling Up, Housing and Communities called the review “shocking”, with Levelling Up Secretary of State Michael Gove saying he was “outraged” by the findings.

Following the FCA’s report, it said it expected brokers to immediately stop paying commissions to third parties, including property managing agents and freeholders, where they do not have appropriate justification and evidence for doing so in line with its rules on fair value.

This came following a tribunal ruling stating the occupants of the Canary Riverside complex in London had unwillingly paid £1.6m in secret commissions to a third party through its insurance broker, Reich.

To this day, the occupants of the Canary Riverside complex have not received any of that £1.6m back.

“We will not hesitate to take action”

Sheldon Mills, executive director of consumers and competition at the FCA, said of the reforms announced today: “Insurance firms must now act in leaseholders’ best interests and ensure that their policies provide fair value.”

He hinted that the work is not yet done, and sent a warning to those who breach the rules.

“Our reforms will help to strengthen the insurance market by providing new protections for leaseholders. We will not hesitate to take action if firms breach these rules.”

In addition to these measures, DLUHC has announced it intends to ban the payment or sharing of insurance commissions with property managing agents, landlords and freeholders.

Leaseholders taking action

Harry Scoffin, co-founder of Commonhold Now, a campaign group looking to abolish leasehold altogether, said in light of the new reforms, leaseholders are looking to resubmit their requests for information around where the insurance premiums they pay are ending up.

He said: “Certain leaseholders who have been refused access to information about commissions have told Commonhold Now that they intend to resubmit their applications first thing Monday, in light of today’s news.”

He welcomed the reforms, continuing: “The FCA confirmation that new rules will come in on multi-occupancy buildings insurance in the new year will give leaseholders peace of mind that some relief is around the corner from the bribes and kickbacks now endemic in this sector.

“Having mandatory disclosure of ‘commissions’ and a breakdown of the premiums, together with a requirement on insurance firms to act in leaseholders’ best interests, should chip away at the incentive structure that sees freeholders choose insurance policies, which leaseholders pay for, that offers them the biggest payday.”

Biba response

The British Insurance Brokers' Association has responded to the announcement made this morning.

It reads: "BIBA welcomes the rule changes announced by the FCA today in its Policy Statement on residential multi-occupancy buildings.

"In particular, we welcome the introduction of the new policy stakeholder status for leaseholders and the increased transparency requirements around insurance arrangements and remuneration.

"The Statement coincides with extensive new work Biba has commissioned to help members better demonstrate fair value for the activities and services they provide in this sector. This entails a new Fair Value Assessment Framework which members can adapt for their own business models to articulate, measure and evidence value for both the commission they retain and any commission they might share with freeholders and property managing agents for insurance related activities they undertake.

"It also coincides with a new member pledge that BIBA members are being asked to sign up to which makes important commitments around remuneration practices for residential buildings over 11m in height that have material fire safety issues.

The statement also gives somewhat of an update to the fire safety reinsurance facility, currently in development alongside the Association of British Insurers and others.

"Finally, we are at an advanced stage in our work with the ABI and McGill & Partners to launch a new Fire Safety Reinsurance Facility later this year which will allow a group of leading insurers to deploy more risk capacity for medium and high-rise residential buildings that have material fire safety issues. The aim of this scheme is to reduce reliance on expensive excess of loss reinsurance placements which brokers need to purchase to ensure a building is fully insured and hence reduce the overall premium."