Gallagher firm business model challenged amid FCA property commission crackdown

Artex sets up captive structures for property managers and freeholders in the UK sector, allowing them to boost income streams by taking a share of their own risk.

The business’ own marketing materials highlight the impact of commission disclosure, instead suggesting the use of captives where property managers and freeholders can make up to 47% more income compared to traditional commission arrangements.

Artex also suggests a property firm can still earn commission as well, albeit at a lower percentage level of the premium.

Regulator

The Financial Conduct Authority announced plans last month for a near ban on commissions being handed out to those in the property chain.

In its report, the FCA said captives were not part of its investigation but highlighted captives as an ‘ongoing concern’, adding that additional regulatory work may be needed.

The FCA stated: “We have seen instances of freeholders, property managing agents and insurance brokers having commercial arrangements with particular insurers which benefit them but not leaseholders.

“For example, captive reinsurance arrangements domiciled outside the UK and outside the scope of our regulation.”

The regulator said most brokers only rebroke once every three years – placing business with captives and insurers that potentially do not have leaseholders’ best interests.

Huge question

Martin Boyd, chair of the Leasehold Knowledge Partnership, said: “There is a huge question as to why anyone in this sector needs to be using offshore captives.

“I have talked to a social landlord, and they use an offshore captive in America, but they use that to give them better access to the secondary market and to reduce overall premiums.

“Whereas, of course, what Artex is doing is helping create systems that don’t necessarily benefit the consumer.

“Our view of the FCA report, is that they are finally implementing something we have been arguing with them that they should have done for 10 years.”

FCA captive probe

Compliance consultant Branko Bjelobaba said captives could be used to reduce premiums for leaseholders, but this has not happened in practice.

“This is done to benefit everyone else, apart from the leaseholder, in maximising the profits without any comebacks from the leaseholders who are still paying for all of this,” he said.

Bjelobaba urged the FCA to press on with an investigation into the captive insurance market in the UK property sector.

He added: “They need to look at every single ruse to make money at the leaseholders’ expense, which doesn’t benefit them primarily.

“Any arrangement has to be under a magnifying glass, so that the leaseholder benefits primarily and not anyone else.”

Artex declined to comment.

FCA probe

The regulator said last month brokers will also have to reveal full commission disclosure to customers on how much commission they receive from carriers for buildings’ insurance.

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 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”.

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