The UK’s Financial Conduct Authority (FCA) is proposing changes that aim to reduce the cost of insuring residential apartment blocks and ensure fair practices in the market. This move comes in response to concerns over the wrongful use of commissions, particularly following...
The UK’s Financial Conduct Authority (FCA) is proposing changes that aim to reduce the cost of insuring residential apartment blocks and ensure fair practices in the market.
This move comes in response to concerns over the wrongful use of commissions, particularly following the tragic Grenfell Tower fire in 2017, which led to significant increases in building insurance costs.
Addressing unfair Commission practices
The FCA’s proposals include a requirement for insurers to act in the best interests of leaseholders and a ban on brokers recommending policies based on the amount of commission they receive.
The watchdog expects brokers to immediately cease passing on part of their commission to the managing agent or freeholder of the building being insured if it does not comply with FCA’s fair value rule.
Sheldon Mills, FCA executive director of consumers and competition, stated, “We are taking action against these practices and we won’t hesitate to take further action if brokers don’t comply with our rules.”
Review of broker commissions and impact on UK leaseholders
The FCA conducted a review of 16 insurance brokers’ sales to apartment blocks between January 2019 and September 2022, publishing a consultation paper on its proposals.
The review found that the average per-policy insurance broker commission in the UK increased by 46% over the period, with firms passing on more than £80 million ($99.57 million) of their commission to managing agents or freeholders – a cost ultimately borne by leaseholders.
The watchdog observed that brokers were often unable to articulate the insurance-related services or benefits of value provided by the parties sharing commission.
Under the FCA’s proposed changes, leaseholders would gain transparency on insurance costs and the ability to challenge poor value.
The FCA acknowledged the issues surrounding insurance costs and commissions have caused considerable distress for leaseholders, including negative impacts on their mental health and well-being.
The watchdog plans to publish its final rules in the third quarter, followed by a three-month implementation period. With these proposed changes, the UK’s financial watchdog aims to protect homeowners and ensure a fair, transparent insurance market for all parties involved.