Darren Bagnall from Flat Living Insurance looks at the possible effects the proposed Leasehold Reform Bill will have.
The proposed Leasehold Reform (Disclosure and Insurance Commissions) Bill was presented as a private members bill to the House of Lords in July 2022. The bill could mandate compulsory commission disclosure by landlords while also preventing landlords from recovering service charges from their leaseholders if they have failed to comply with the required disclosures.
While it’s uncommon for private member bills to make it through to law, we think this is an important bill to discuss as it’s reflective of larger changes in the sector. Read on to find out how this bill is representative of the winds of change for the insurance sector.
The Background to the Leasehold Reform Bill
Michael Gove, the (now ex) secretary for levelling up, housing and communities, ordered an inquiry into the buildings insurance market because of rising concerns around the fairness of service charge fees.
In May, the Financial Conduct Authority announced that it would be collecting data from the industry to help inform “political interventions” if they found that broker fees were a “significant cause of harm” (Insurance times 11th May 2022 and 23rd May 2022). They went on to say that the FCA would consider changing certain rules to allow leaseholders access to information about policies bough by their freeholders- something that would also be mandated by the Bill.
If these rules came into effect, the Government would no longer need to intervene as the FCA could simply change the rules to ensure that the market is “honest competitive and fair” which is what they are mandated to do.
In July 2022, the FCA published its final rules for its Consumer Duty regulation. These rules require insurance firms to review their products and services against the FCA’s standards of fairness and one of the four standards is “fair price and value”. The regulator has stated that it wants to become “more assertive” and have previously expressed concern over hidden remuneration elements. They now state that fairness to leaseholders must be taken into account in firms’ value reviews.
The previous regulator, the Financial Services Authority (replaced by the FCA and the Prudential Regulation Authority in 2013), had actually been aware of these issues back in 2005, as noted in unpublished reports that were later seen by the Insurance Times. They noted that the structure of the market has created a “monopoly position” for freeholders over leaseholders in relation to buildings insurance and service charges.
Is the Market Unfair to Leaseholders?
It is known that leaseholders (usually those living in blocks of flats) are largely at the mercy of their landlords/freeholders when it comes to insurance and service charges. Insurance for these multioccupancy buildings is chosen by the freeholder/landlord or by an appointed Managing Agent. Leaseholders are not able to do this themselves and are also not privy to the details of the process or the resulting policy as they are not the ‘customer’ according to current property laws.
This has led, in some cases, the freeholders/landlord or the appointed agents choosing high premium policies for the benefit of the insurer and to allow some of the service fee made by the broker to be paid to the customer as a commission. The higher premium is then paid by the leaseholders via their service charges.
There is no incentive for the freeholder/landlord/agent to seek out a lower premium as they are not responsible for the cost of the insurance and it’s not easy for leaseholders to challenge their service charge fees. Challenges can often involve lengthy litigation via the First-Tier Tribunal or the Property Chamber.
The size of the leasehold market means that millions of residents can be affected by this untoward practise.
Principal at financial compliance consultancy Branko, Branko Bjelobaba, is quoted as saying: “Leaseholders should be entitled to know about commission arrangements, because the worrying thing is that the very largest brokers who have cornered this market are being paid or demanding extortionate rates of commission, which insurers are happy to pay to keep the business. Brokers are then able to split this commission with property managing agents as their cost of doing business. The fact is leaseholders could be insured for a lot less…It’s totally wrong.”
There are guidelines in place that require insurers to conduct value assessments on an annual basis and Government rules require them to demonstrate that commission structures are appropriate for the work being done by brokers. However, no specific formula has been set out.
How Will the Proposed Bill Challenge the Situation?
If this Bill comes into effect, leaseholders will be able to view the commission associated with their policies and therefore give them more power to demonstrate that they are not receiving value for money, making the process of challenging service charges more worthwhile and likely to lead to wins for leaseholders.
However, many, including Harry Scoffin (a reporter at leaseholder campaigning charity Leasehold Knowledge Partnership) and the aforementioned Branko Bjelobaba, believe that the only real solution to the issue will be for leaseholders to be able to choose their own insurance via residents associations.
Harry Scoffin holds a grim view of the sector, saying: “The majority of the problem is that leaseholders need to eventually be placing their own insurance policies. The reality is that for as long as people don’t have control over their own services, freeholders and insurers will innovate into the next scam.”
Bjelobaba holds the same sentiment, saying: “The fact that leaseholders cannot arrange their own insurance is the issue. The one thing that would massively help is to allow the real person at the end of the chain who is paying for all of this – which Consumer Duty talks about all the time – to procure their own policy.”
Flat Living Insurance provides specialist insurance policies for blocks of flats and apartments. For more information or a quote, please contact a member of the Flat Living Insurance team on 0333 577 2044.
The Cost-of-Living and Block Management
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