No2 – Gaming the Leasehold system – The practice of taking INFLATED insurance commissions

I’m qualifying this by using the term “inflated” as the market is structured in such a way that managing agents have to take a commission to make arranging insurance a viable service to offer to leaseholders.

Any managing agent that is involved with the arrangement of insurance has to be FCA registered and regulated. Smaller agents typically gain this by becoming an appointed representative of a broker, larger agents may have their own insurance department and a direct registration with the FCA.

Any agent involved in arranging insurance and must carry a sufficient level of professional indemnity insurance.

Additionally, managing agents are usually expected to assist with insurance claims, however, no insurers cover the managing agents costs in managing a claim.

In order to recover these costs, managing agents typically take a commission when arranging the policy, however, the levels of commission vary wildly.

In September 2023, the FCA published Policy Statement PS23/14 having carried out a series of reviews and consultations on multi-occupancy buildings insurance, particularly after concerns about inflated commissions and poor value for leaseholders. Key points include:

1. Fair Value Principle: Brokers and insurers must ensure that any remuneration (including commissions) reflects fair value for the customer. Commissions should not lead to inflated costs for leaseholders.
2. Ban on Commission Sharing: The FCA expects brokers to stop paying commissions to third parties (including managing agents and freeholders) unless there is clear justification and evidence that the payment aligns with fair value rules.
3. Disclosure Requirements: Under Policy Statement PS23/14, firms must disclose all forms of remuneration (including contingent commissions and profit-sharing) in cash terms to leaseholders. Products must be designed and priced to offer fair value.
4. Government Alignment: The Department for Levelling Up, Housing and Communities (DLUHC) intends to ban the payment or sharing of insurance commissions with managing agents, landlords, and freeholders, replacing them with transparent administrative fees.

How Commissions Are Taken

1. Broker Commission Sharing

Insurance brokers often share part of their commission with landlords, freeholders, or managing agents as a “reward” for placing business.

These commissions are embedded in the insurance premium, which leaseholders pay through service charges, making them largely invisible to those footing the bill.

2. Layered Commission Structures

In some cases, multiple intermediaries (e.g., large managing agents, freeholders, and connected parties) take slices of commission, creating “layers” that inflate costs without adding real value. It also allows the freeholder/managing agent to hide the bulk of the commission structure as the freeholder/managing agent only has to declare the commission paid to them directly.

The FCA report also highlighted the following serious discrepancies.

1. Lack of Justification

FCA reviews found brokers paid over £80m in commissions to third parties, usually freeholders or managing agents, with little evidence of additional work or benefit to leaseholders. Average broker commission per policy rose by 46% during the review period.

2. Conflict of Interest

Commissions incentivise intermediaries to choose policies based on remuneration rather than value for leaseholders. This was highlighted as a systemic issue in FCA reports and government consultations.