"Our reforms will help to strengthen the insurance market by providing new protections for leaseholders."
- Sheldon Mills, executive director of consumers and competition at the FCA
Last year, the Financial Conduct Authority (FCA) acknowledged that, since the Grenfell tragedy, hundreds of thousands of leaseholders have been forced to endure the difficulties of living in buildings with known fire safety issues, resulting in substantially increased costs of insurance. A prime example occurred ten days before, with the residents of 52 Compass Point flats in Wynthenshawe, Greater Manchester, allegedly ordered out of their homes unless they paid a £250k insurance bill.
The invoice allegedly reflected risks caused by fire safety defects in the flat block, including missing fire breaks within the timber-frame structure and unsafe timber balconies. Consequently, the building’s original insurer, Allianz, allegedly declined to offer a new policy, and under a new insurer, premiums rose from £12k to more than £150k to insure the building.
As part of its commitment to becoming a more “innovative, assertive, and adaptive regulator,” the FCA proposed a range of recommendations and potential remedies for leaseholders, based on a review of the multiple-occupancy residential building insurance market and how firms can provide more affordable cover for leaseholders.
This review was commissioned on the 28th January 2022 and has since revealed that between 2016 and 2021, the average price of premiums for buildings with fire safety risks had more than doubled, seeing a 125% increase from £6,800 to £15,300. It also showed that there was a reduction in the supply of insurance for multi-occupancy residential buildings as well as reduced appetite amongst insurers to take on new business due to falling profitability.
Consequently, the potential remedies suggested by the FCA sought to give leaseholders greater protections and information about insurance costs, as well as improve the affordability and availability of insurance.
On the 21st April 2023, the FCA wrote to the Secretary of State for Levelling Up, Housing, and Communities at the time, confirming that since the review, it had published two documents: a report of the findings from its review into insurance broker remuneration and a consultation paper setting out proposed changes to its rules.
FCA’s report on insurance broker remuneration includes findings from 16 firms about their work on multi-occupancy buildings insurance, including qualitative information on fair value assessments and quantitative data on relevant policies and remuneration from January 2019 to the end of September 2022. This revealed that absolute levels of remuneration, including commissions, have risen by nearly 40% across the period under review, despite reductions in commission percentages. The average broker remuneration per policy rose from £2,170 in 2019 to £3,010 in 2022.
Most of the brokers in our sample did not give us adequate evidence to show that they consistently deliver fair value for multi-occupancy building products or take into account the interests of leaseholders when assessing whether they are providing value. This was due to various factors, including product value assessment deficiencies, shortcomings in records, and insufficient scrutiny of commissions paid to others.
In light of these findings and prior concerns, the FCA said it would take the following actions:
- Intervene using a range of regulatory tools (which may include skilled person reports) where firms have significant weaknesses in meeting their regulatory obligations (including on fair value). We will ensure firms urgently remediate and mitigate these weaknesses and any harm they are causing.
- Act to ensure that firms who need to make improvements to fully meet their regulatory obligations address these weaknesses promptly. A Senior Manager Function holder will then need to attest and evidence that the firm is delivering fair value consistently.
- Expect brokers to immediately stop paying commissions to third parties without appropriate justification in line with our rules on fair value. We will undertake further reviews across various products, and where we see this practice still occurring, we will take regulatory action.
Today, the FCA confirmed these new measures to support leaseholders in the multi-occupancy buildings insurance market. From 2024 onwards, insurance firms will be forced to act in leaseholders’ best interests, treat them as customers when designing products and will be banned from recommending an insurance policy based on commission or remuneration levels. Likewise, insurers will also be required to ensure that their insurance policies provide fair value to leaseholders and include all information about the policy and pricing, including any commission paid by leaseholders.
After reviewing insurance broker remuneration, the FCA expects 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 addition, the Department for Levelling Up, Housing and Communities (DLUHC) has announced its intention to ban the payment or sharing of insurance commissions with property managing agents, landlords and freeholders. The FCA will work with DLUHC to ensure that this action is delivered, adjusting its regulations if necessary.
Commenting on these reforms, Sheldon Mills, executive director of consumers and competition at the FCA, has said:
“Insurance firms must now act in leaseholders’ best interests and ensure that their policies provide fair value. Our reforms will help to strengthen the insurance market by providing new protections for leaseholders. We will not hesitate to take action if firms breach these rules.”