‘Outraged’ Gove demands immediate penalties on brokers failing on property commissions

In a scathing letter last week to Financial Conduct Authority CEO Nikhil Rathi, the Secretary of State for Levelling Up said he was “outraged” that in the last three years broker commissions on buildings’ insurance have risen 40% and £80m has been shared out to third parties.

Urging the FCA to take a hardline stance, he wrote: “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.”

Market failure

Gove was responding following an FCA report last week that found widespread market failure in the buildings’ insurance market. The report found commissions were “high”.

Brokers are “happy to load these unwarranted and opaque costs on innocent leaseholders”, Gove wrote.

He detailed being more determined than ever to ensure the government leads a ban on third parties in the property chain, such as freeholders and managing agents, sharing commission with brokers.

“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,” he added.

In a final blast at brokers, Gove talked of “lax industry practices” after the FCA struggled to obtain and compare broker data on the buildings’ insurance market.

Insurers in the firing line

Insurance companies were also under fire from Gove over rising prices. He wants an FCA plan on ensuring “the market is operating effectively”.

Gove set out: “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.”

Gove’s concerns follow on from the FCA report which detailed scant evidence that insurers had any oversight and monitoring on broker commissions.

FCA letter to Gove

In the FCA’s own letter to Gove last week, executive director of Consumers and Competition Sheldon Mills vowed to intervene using a “range of regulatory tools”, which may include a skilled persons report.

He reported that a senior manager at insurance firms will need to “attest and evidence” that their firm is delivering fair value.

Mills expects brokers to “immediately stop paying commissions to third parties” unless fair value can be shown.

On transparency, he added the FCA will “introduce enhanced disclosure requirements which will provide leaseholders with information about the policy, potential conflicts of interests, remuneration of brokers and the number of alternative quotes obtained”.

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.

Gove first put pressure on Rathi to help leaseholders in a letter in January 2022.

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.

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