FCA announces overhaul in broker property commissions amid market failure

Brokers will also have to reveal full commission disclosure to customers on how much commission they receive from carriers for buildings’ insurance.

These are two of the biggest changes the regulator wants to impose by the end of this year on the buildings’ insurance market.

FCA consumer and competition director Sheldon Mills says the regulator “will not hesitate” to take action against brokers who fail to comply.

Insurers are also in the firing line for failing to have oversight and controls on commissions, despite it being required under regulations. 

The FCA said today it 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 line with our rules on fair value”.

The FCA report into the multi-occupancy buildings insurance market found:

• Most brokers failed to show their products delivered fair value
• Brokers typically receive between 30% and 49% commission from insurers, sometimes as high as 62%
• Broker average per policy commission rose 46% over the FCA review period into the market from January 2019 to September 2022
• ‘Large’ amounts of commission paid away to intermediaries in the property chain such as freeholders and property managing agents – but brokers showed little evidence that the third-parties provided any value
• The insurance chain does not deliver anywhere close to best value-for-money because leaseholders, with limited rights, are charged the insurance bill. Leaseholders will now be defined as customers of buildings’ insurance

FCA deadlines for brokers

The FCA, which investigated data from 13 brokers and three managing agents for the report, wants the insurance industry to respond to its findings by 9 June.

The final rules will be published in third quarter of this year. Insurance firms will then have three months to implement the rules.

FCA executive director of consumer and competition Sheldon Mills 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.”

Insurer failures of oversight 

The report also highlighted evidence of failures coming from the insurers to have proper oversight on the commissions and remuneration. 

The regulator stated insurers must ensure their distribution arrangements minimise the risk of negatively affecting fair value, specifically stating this comes under the rule of PROD 4.2.14NR. 

Four out of the 16 firms studies had net pricing arrangements with the insurer. This allowed brokers to then set their own commissions – but there was evidence that ‘very few’ insurers actually carried out any oversight once the net rate was handed down. 

According to the FCA, “the role of the insurer is also significant in agreeing commission rates and other remuneration, given their obligations as product manufacturers to ensure that fair value is being delivered by their products”.

In a worrying verdict on potential insurer misconduct on buildings’ insurance, the FCA said: “Very few firms could provide any evidence [for net rated or standard commission arrangements] that regular reviews and discussions took place around the level of commission and whether these arrangements are consistent with providing fair value, despite us specifically requesting any such evidence.

“Without such controls it is hard to see how firms can state that their products and distribution arrangements are offering fair value.”

Grenfell disaster

The crackdown in the buildings’ insurance market comes after leaseholders in high rise flats complained they were hit with sky-high insurance premiums following the Grenfell Tower disaster in June 2017.

Flammable cladding was cited as a cause of the fire spreading, resulting in insurers backing away from taking on the risk for any buildings cloaked with the material.

The Secretary of State for Levelling Up, Housing and Communities Michael Gove put pressure on the FCA chief executive Nikhil Rathi to help leaseholders.

A report was published in September last year outlining potential remedies for market.

The government itself is ready to pass legislation to prevent commission payments to third-parties in the property sector for multi-occupancy buildings.