Gove is ‘outraged’ over buildings insurance scandal

Gove is ‘outraged’ over buildings insurance scandal

0:01 AM, 24th April 2023, About A year ago 11

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The housing secretary, Michael Gove, says he is ‘outraged’ over a Financial Conduct Authority (FCA) investigation into broker commissions on multiple-occupancy buildings insurance which found that leaseholders are paying rocketing premiums – fuelled, in part, by hefty commissions being paid to freeholders, landlords and managing agents.

Last Friday, the FCA revealed that an investigation would lead to a crackdown on the practice – and says that landlords and leaseholders should take legal action to reclaim their fees.

It is estimated that the fees could run into billions of pounds.

In a letter to the FCA – which is published in full below – Mr Gove says: “I was, in all candour, outraged by your findings.

“You have found that broker remuneration has risen by nearly 40% in the last three years, with £80m of commissions are going to other parties – and that brokers are unable to provide any evidence to demonstrate that this represents fair value.”

‘My resolve to ban property managing agents, landlords and freeholders taking commissions’

He added: “Your report strengthens my resolve to ban property managing agents, landlords and freeholders taking commissions on buildings insurance and replace with transparent fees.

“I believe the FCA should take immediate enforcement action against those brokers and managing agents that cannot demonstrate their commissions represent fair value, where they are regulated by the FCA and by RICS.

“Third-party commissions are inflating the cost of covering insurance placement and handling fees.”

Mr Gove’s letter is below:

Broker remuneration for buildings insurance in multiple-occupancy residential buildings

Thank you for your report detailing the findings of your investigation of broker commissions for buildings insurance in multiple-occupancy residential buildings. I am grateful to you for agreeing to my request that you investigate further my serious concerns about the role of commissions in significant premium increases. Regrettably, the report compounds those concerns.

I was, in all candour, outraged by your findings. You have found that broker remuneration has risen by nearly 40% in the last three years, with £80m of commissions are going to other parties – and that brokers are unable to provide any evidence to demonstrate that this represents fair value. Despite this, they are happy to load these unwarranted and opaque costs on innocent leaseholders. We must continue to shine a light on these unfair practices, and to improve the operation of this market. Leaseholders are being badly let down. This must not continue.

I will be writing to the British Insurance Brokers’ Association to express my consternation that these practices remain, given the detrimental impact on leaseholders and to seek their members’ commitment to rectify them with immediate effect. Your report strengthens my resolve to ban property managing agents, landlords and freeholders taking commissions on buildings insurance and replace with transparent fees. I see that the market has so far disregarded your open letter of January 2022, which made clear that leaseholder needs should already be a consideration. In that light, I welcome your intention, subject to consultation, to formalise the rights of leaseholders in a product’s fair value assessment and ask that any resultant rules changes are implemented by the Autumn.

I believe the FCA should take immediate enforcement action against those brokers and managing agents that cannot demonstrate their commissions represent fair value, where they are regulated by the FCA and by RICS. Third-party commissions are inflating the cost of covering insurance placement and handling fees. Managing agents should be completely transparent about where service charges go. By Summer Recess, please send me an update on enforcement action and

clarify how managing agents’ behaviour will be directly addressed by the FCA under your powers, and those delegated to RICS.

I note from the report the difficulty you had in obtaining and comparing data. This is in itself an indictment of lax industry practices. We must improve that data so that we are to evaluate the effectiveness of the action that industry, regulators and the government take. More than six months have elapsed since your initial report was published, so I would be grateful for your confirmation that brokers and insurance firms are recording data as per the enhanced dataset, as well as what steps you will take if firms are not accurately recording this data.

While I recognise that costs from brokers and commissions represent a significant part of any premium, your report implies that the insurance element of the premium has increased faster than commissions. Home Office data shows reductions in both fire incidence and severity over recent years. In recent years, our built environment has become demonstrably safer than that reflected in historic actuarial data: we have removed dangerous material from countless buildings, fixed internal defects, created new regulators that will ensure buildings are safer and given leaseholders the power to hold relevant parties to account. In this context, I expect insurers’ pricing to reflect that reduction in risk. I would welcome a proposal from the FCA on how to guarantee the market is operating effectively in this respect, and to expose any who fail to meet our expectations.

I ask that the FCA produces a further report by no later than the end of October with updates on insurer modelling of the risk, adoption of the ABI/BIBA industry data standards and any changes in commissions and pricing of buildings insurance. We must continue to strain every sinew to protect leaseholders from exploitation. I am grateful for your continuing support in this vital endeavour.

I am copying this letter to the Chief Executive of the CMA and the Economic Secretary to the Treasury.

Rt Hon Michael Gove MP

Secretary of State for Levelling Up, Housing & Communities

Minister for Intergovernmental Relations


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Contango

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9:59 AM, 24th April 2023, About A year ago

Gove says
"In recent years, our built environment has become demonstrably safer than that reflected in historic actuarial data: we have removed dangerous material from countless buildings, fixed internal defects, created new regulators that will ensure buildings are safer and given leaseholders the power to hold relevant parties to account. In this context, I expect insurers’ pricing to reflect that reduction in risk".
It is apparent that he is unaware that storm has been the driver of worsening loss experience. The two storms in early 2022 resulted in huge losses and the rise in premia are related to insurers losses due to storm. Some say this is because climate change is upon us, I do not know if this is so or not but can say without any shadow of a doubt that on the general insurance business with which I have been involved storm damage since Jan 2022 is the highest its ever been and rivalled only by the great hurricane of 1987. Proportionately the losses on our risks has been higher in this period due to storm losses.

Karen

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11:47 AM, 24th April 2023, About A year ago

He has only just found this out now?

Reluctant Landlord

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13:02 PM, 24th April 2023, About A year ago

I'm 'outraged' by Gove and his meddling in Housing generally....

Contango

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13:10 PM, 24th April 2023, About A year ago

Right in the middle of Covid the FCA changed their reporting system requiring data on the basis of their new software. The costs of regulatory compliance and indemnity insurance are for a small general insurance business are around 40 per cent of the amount of commission. If the commission rate was zero the regulatory costs would still apply!

Leith Hince

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13:47 PM, 24th April 2023, About A year ago

Reply to the comment left by DSR at 24/04/2023 - 13:02Well done Mr Gove for highlighting these crooks in the insurance industry who have been ripping off innocent leaseholders for years, outrageous commissions for doing s0d all.

Karen

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15:06 PM, 24th April 2023, About A year ago

All managing agents I have come across take commissions on arranging the block insurance. They should be forced to declare the amount to leaseholders automatically in the service charge accounts.

Contango

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15:17 PM, 24th April 2023, About A year ago

Assuming there are any accounts...bearing a small commission on the premium is actually much cheaper for the leaseholder than bearing the cost of audited accounts being prepared and circularised. There are many leasehold situations - such as maisonettes - where there is nothing other than the annual buildings premium to be collected, because there are no common parts managed by the ground landlord.

Glyn Jenkins

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11:15 AM, 29th April 2023, About A year ago

Leasehold is awash with unregulated cartel,s. It's a lovley white collar tickle.
Gove knows this but feels he ought to do something as an election draws nearer. He's probably got a few BTL flats himself and is feeling the pinch.
Go get them Micheal .

Contango

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11:32 AM, 29th April 2023, About A year ago

The law already gives leaseholders the ability to succeed to freeholders and take over management if they wish in the majority of cases, where the ground landlord is responsible for management and repair of the building in which the leasehold flat is located.

blair

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20:59 PM, 30th April 2023, About A year ago

Where has this Micheal Grove been!! This has being going on for years Some resident Assoc. etc have picked up on this and even some lease mention the point
It is also a very typical practice on commercial leases. Indeed a lot of lawyers used to if not still do offer to arrange the insurance as are agents for insurance companies to pocket the extra monies.
I am now retired but as a RICS member managing mainly commercial buildings it was my practice to get a net net premium so that I could ensure the tenants/lessees got the best deal and I earned "brownie points"
In residential if the lease states the insurance to be at cost then surely these secret commissions are in breach of the lease terms because it is not a true cost.
There is also "the law of agency" so depending on whose appointed the agent they should be declaring the secrete commission ?

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