FCA to clamp down on high insurance costs for leasehold flats

The UK’s top financial regulator said on Friday it would beef up protection for leaseholders in blocks of flats from paying excessive insurance costs as part of a clampdown on insurance brokers overcharging for the products and handing large commissions to landlords.

The investigation into brokers covering about a third of the market found firms had not produced enough evidence to justify a nearly 40 per cent rise between 2019 and 2022 in their fees from these insurance products, the Financial Conduct Authority said in an accompanying report.

It found brokers included in its sample, passed on £80.7mn in commissions, or more than third of total commissions, to third parties over the review period. It said brokers were “often unable to articulate” what landlords were doing to justify these sums being passed on.

Insurance for multi-occupancy buildings, which covers residents against events such as water leaks, has become a key issue in a growing scandal over the excessive service charges landlords have levied on leaseholders.

Tenants of flats must pay towards a group buildings insurance policy they have no control over selecting nor transparency over the contract and any commissions paid. These policies have become far more expensive in recent years, especially for residents of cladded buildings after the 2017 Grenfell Tower tragedy.

Recent legal victories brought by individual leaseholders have thrown light on structures where freeholders and managing agents have taken substantial commissions on insurance products.

The FCA said brokers had shown “significant shortcomings” in applying fair-value rules to what they charge for their own role in securing insurance and what they pay to others.

The report said the rise in brokers’ fees had outpaced the rise in costs over the period. The FCA identified “deficiencies in [brokers’] product value assessment work, shortcomings in their recording and analysis of their own costs and insufficient scrutiny of the commissions they pay to others”.

It was “likely” that brokers would need to reduce their percentage-based commission rates if they could not demonstrate a sufficient benefit to customers, the regulator said.

Under the proposed regulation, brokers found to be taking too much from leaseholders could face enforcement action leading to fines and bans. But the FCA stopped short of announcing a cap on commissions, citing “practical concerns” given the varying split of responsibilities between brokers and landlords. The latter do not fall within the regulator’s remit.

The FCA said it would consult on the proposed changes with a view to introducing the measures later this year.

The government, which pledged in January to ban the commissions and replace them with a flat fee, welcomed the clampdown as a “first step”, but said it did not go far enough to protect leaseholders. It urged the regulator “to take immediate enforcement action on the unreasonable practices highlighted in [its] report”.

Martin Boyd, chair of the Leasehold Knowledge Partnership, a residents’ campaign group, said he was pleased the regulator had “accepted something that we have argued for 10 years [was] a problem,”

Mick Platt, director of the Residential Freehold Association, which represents landlords, said it welcomed the move “to improve the transparency of the multi-occupancy leasehold buildings insurance market.”

The regulatory changes are part of a broader push to overhaul the leasehold system. Housing secretary Michael Gove has said the “outdated feudal system” should be scrapped and indicated he wants to bring in legislation later this year.