Schroders fund warns leaseholders replacing commission would increase insurance costs

The chair of a Schroders-managed fund has warned leaseholders at a Manchester block of flats that their insurance costs would “undoubtedly increase” if a controversial, industry-wide commission structure was replaced by a flat fee.

The UK government promised last month to ban managing agents, landlords and freeholders from taking commissions for their role in arranging buildings insurance policies, and to replace them with transparent fees for leaseholders. Commission-based structures, used across the industry, have become a source of growing controversy over perceived conflicts of interest.

Barry Gilbertson, chair of the Ground Rents Income Fund, managed by FTSE 100 group Schroders, wrote two weeks ago to a leaseholder at the Castlegate development in Manchester saying the fund would be “happy . . . to change the insurance commission payable to the landlord to an equivalent fee for managing the insurance process”.

But Gilbertson warned that the cost of the fee could go up if the fund charged correctly for the amount of time it took to arrange the insurance, and that it would attract higher taxes: “Thus, the cost would undoubtedly increase but would ensure the level of transparency sought by yourself.” 

Schroders told the Financial Times it had been charging the Castlegate leaseholders a percentage-based commission “significantly below average market rates”, in recognition of the fact that issues with the building, including cladding, had increased the cost of insurance.

The Schroders fund holds freeholds and other ownership on 19,000 underlying residential and commercial units, collecting ground rents from leaseholders for the benefit of its shareholders. Ground rents are a fee leaseholders pay to cover the land a home is built on. But as landlord, the listed fund also receives commissions for its role in arranging overarching insurance policies for its buildings.

The correspondence underlines the challenges that will be unleashed by removing incentive structures that have existed for decades at properties up and down the UK. As the FT reported earlier this month, leaseholders at a London development have already challenged the £10,000 insurance placement fee levied by landlord Ballymore after it stopped taking a commission.

In the Castlegate letter, Gilbertson, a former adviser to the Bank of England, suggested another option: that the leaseholders could take over the management of the insurance themselves.

This is currently placed on behalf of the fund, which is landlord through the holding of a very long lease over the property, by Schroders, working with broker Lockton. The job would include “arranging the collection of premiums from individuals, answering any queries or claims inquiries and managing the claims handling process”, Gilbertson wrote.

Schroders was appointed as manager to the fund in April 2019, with a brief to help it navigate leasehold reforms that have slashed its share price.

In 2020, the percentage commission Castlegate leaseholders paid to the fund was 19 per cent of the insurance premiums, or £6,700, according to the correspondence seen by the FT. Following a review by the new manager and board, this was reduced to just above 5 per cent in the following years.

The commission, since the reduction, now amounts to just under £40 per leaseholder. But Tom Minnikin, one leaseholder who has challenged the structure, said that was in addition to £300 that he pays in ground rent.

“My problem is that the commission is on top of what I already pay,” he added. “It all tots up.”

A spokesperson for the fund said it was “focused on delivering fairness, transparency and affordability for leaseholders in the residential leasehold sector” and that “proactive steps” had been taken to ensure improved insurance terms at Castlegate.

The commission rate was now “significantly below average market rates of up to 30 per cent”, the spokesperson said, adding the fund is now pursuing the developer to remedy buildings defects that have pushed up insurance costs.

The fund “supports the principle of replacing commissions with more transparent fees that would better reflect the work undertaken”, they added. It is the only one managed by Schroders to receive landlord commission on insurance, according to a person familiar with the matter. Lockton declined to comment.

Insurance commissions have become a new frontline in a battle between leaseholders and landlords over service charges. “There is increasing awareness of the question of whether service charges are right and reasonable, and people are looking at that more closely,” said John McGhee, a barrister at Wilberforce Chambers with expertise in property disputes.