The proposed rules aim to give leaseholders more rights and information about the insurance policies that cover their buildings and to prevent brokers from paying or receiving commissions that do not reflect the value of the service provided.
The FCA's proposals follow a review of the broker remuneration practices in the multi-occupancy buildings insurance market, which found evidence of high commission rates and poor practices that were at odds with delivering fair value to the customer.
Over the review period, the average per-policy insurance broker commission increased by 46 per cent, while brokers included in the review sample paid over £80m in commission to other parties, usually the freeholder or the property managing agent. The FCA's findings also revealed that some brokers failed to adhere fully to the fair value rules in their remuneration practices.
Leaseholders to be defined as ‘customers’ under FCA’s planned new rules
The FCA's proposed rules define leaseholders as ‘customers’ of buildings insurance. As such, they would have the right to request and receive information about the insurance policy, including the premium, the cover, the excess, and any commission paid.
The proposed rules also require insurance firms to act in the leaseholders' best interests and will prohibit them from recommending insurance policies based on commission or remuneration levels.
Additionally, the FCA expects brokers to cease paying commissions to third parties (including landlords, property managing agents, and freeholders) without appropriate justification and evidence, per the FCA's fair value rules, and has warned that it will clamp down on firms that do not comply.
The regulator will also work with the Department for Levelling Up, Housing and Communities (DLUHC) to ensure the government's intention to ban the payment or sharing of insurance commissions is fully realised, including changing FCA rules if required.
New proposals offer leaseholders more rights and protection
The FCA’s proposals are part of its wider work to ensure that consumers are protected and markets function effectively, especially in the context of the challenges faced by leaseholders of multi-occupancy buildings following the Grenfell tragedy.
In September 2022, the FCA published a report on multi-occupancy buildings insurance, which found that leasehold buildings insurance premiums had risen significantly since the Grenfell tragedy, with leaseholders facing substantially higher costs. The FCA is now consulting on the policy proposals set out in its previous report. This forms part of the FCA’s work to ensure that consumers are protected and markets function effectively.
Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said: "We want to give leaseholders more rights and the information they need to exercise them. Importantly, under our proposals those selling multi-occupancy insurance will have to act in leaseholders’ best interests. 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. We are taking action against these practices, and we won’t hesitate to take further action if brokers don’t comply with our rules."