The rule changes would explicitly require insurance firms to act in leaseholder's best interests
The Financial Conduct Authority (FCA) is proposing new rights and protections for leaseholders to improve the transparency of the multi-occupancy leasehold buildings insurance market.
Under the regulator’s proposals, leaseholders would be defined as customers of buildings insurance, explicitly requiring insurance firms to act in the leaseholder’s best interests, and bar firms from recommending a policy based on commission or remuneration levels.
Insurers and brokers would also need to provide more information about insurance policies to leaseholders, including detail of any commission paid.
We’re proposing new rights and protections for #leaseholders to improve the transparency of the multi-occupancy leasehold buildings insurance market.https://t.co/lDBy1OHu3P
— Financial Conduct Authority (@TheFCA) April 21, 2023
An FCA review found average per policy insurance broker commission rose by 46% over the review period, with firms paying over £80 million of commission to other parties, usually the freeholder or the property managing agent.
The regulator also identified significant shortcomings by some brokers in applying fair value rules to their remuneration practices, and the impact on those ultimately paying the costs of multi-occupancy buildings insurance.
The FCA wants 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 the rules on fair value. It will undertake further reviews across various products and will consider the full range of regulatory tools available to it.
“We want to give leaseholders more rights and the information they need to exercise them,” said Sheldon Mills (pictured), executive director of consumers and competition at the Financial Conduct Authority. “Importantly, under our proposals those selling multi-occupancy insurance will have to act in leaseholders’ best interests.”
Following this review, the FCA said it would take appropriate action where firms had significant weaknesses in meeting their regulatory obligations, including on fair value. It would also engage the senior managers of other firms requiring improvement, so they were fully meeting their obligations.
“Our review revealed large commissions paid by some brokers to freeholders and third parties, like managing agents, with little evidence of any value added to justify these payments,” Mills said. “We are taking action against these practices, and we won’t hesitate to take further action if brokers don’t comply with our rules.”
The Department for Levelling Up, Housing and Communities has announced that it intends to ban the payment or sharing of insurance commissions with property managing agents, landlords, and freeholds.
In September 2022, the FCA’s report on multi-occupancy buildings insurance found that leasehold buildings insurance premiums had risen significantly since the Grenfell tragedy, with leaseholders facing substantially higher costs. The regulator is now consulting on the policy proposals set out in its previous report.
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