Housing Secretary Michael Gove says he is ‘outraged’ by a Financial Conduct Authority (FCA) investigation into brokers’ commissions on multi-unit property insurance which found tenants are paying skyrocketing premiums – fueled, in part, by hefty commissions paid to landowners, landlords and trustees.
Last Friday, the FCA revealed an investigation would lead to a crackdown on the practice – and said landlords and tenants should take legal action to recover their costs.
The charges are estimated to be in the billions of pounds.
In a letter to the FCA – which is published in full below – Mr Gove said: “I was, frankly, outraged by your findings.
“You’ve seen that brokers’ compensation has risen by almost 40% over the last three years, with £80m of commission going to other parties – and that brokers are not able to provide the slightest evidence to show that it represents fair value.”
“My resolution to prohibit property management agents, landlords and freeholders from taking commissions”
He added: “Your report strengthens my resolve to ban property managers, landlords and freeholders from taking commissions on buildings insurance and replace them with transparent fees.
“I believe the FCA should take immediate enforcement action against brokers and management agents who cannot demonstrate that their commissions represent fair value, where regulated by the FCA and by RICS.
“Third-party commissions inflate the cost of covering insurance placement and processing fees.”
Mr Gove’s letter is below:
Broker compensation for building insurance in multi-unit residential buildings
Thank you for your report detailing the findings of your investigation of building insurance brokerage commissions in multi-unit residential buildings. I appreciate your granting my request to further investigate my serious concerns regarding the role of commissions in significant premium increases. Unfortunately, the report compounds these concerns.
I was, quite frankly, outraged by your conclusions. You’ve seen that brokers’ compensation has risen by almost 40% over the past three years, with £80m of commission going to other parties – and that brokers are unable to provide any evidence to show that it represents fair value. Despite this, they are happy to pass on these unwarranted and opaque costs to innocent tenants. We must continue to shed light on these unfair practices and improve the functioning of this market. Tenants are severely disappointed. This must not continue.
I will write to the British Insurance Brokers’ Association to express my dismay at the persistence of these practices, given the detrimental impact on tenants, and to seek a commitment from their members to rectify them with immediate effect. Your report reinforces my resolve to ban property managers, landlords, and freeholders from taking building insurance commissions and replace them with transparent fees. I see that the market has so far ignored your open letter from January 2022, which made it clear that tenants’ needs should already be taken into account. With this in mind, I welcome your intention, subject to consultation, to formalize the rights of tenants in the fair value measurement of a product and request that the resulting rule changes be implemented by ‘autumn.
I believe the FCA should take immediate enforcement action against brokers and management agents who cannot demonstrate that their fees represent fair value, where regulated by the FCA and RICS. Third-party commissions inflate the cost of covering insurance investment and management fees. Managing agents should be fully transparent about where the service fee goes. Before the summer holidays, please send me an update on the application measures and
clarify how the behavior of management agents will be directly dealt with by AFD under your powers, and those delegated to RICS.
I note in the report the difficulty you had in obtaining and comparing the data. This in itself is an indictment of lax industry practices. We need to improve this data to assess the effectiveness of actions taken by industry, regulators and government. More than six months have passed since the publication of your initial report, so I would be grateful if you could confirm that brokers and insurance companies are recording data in accordance with the improved data set, as well as the measures that you will take if companies do not record this data accurately. data.
While I recognize that broker costs and commissions are a significant part of any premium, your report suggests that the insurance element of the premium has increased faster than commissions. Home Office data shows reductions in the incidence and severity of fires in recent years. Over the past few years, our built environment has become demonstrably safer than historical actuarial data reflects: we have removed hazardous materials from countless buildings, corrected internal defects, created new regulators that will keep buildings safe and given to tenants the power to hold the parties concerned estimate. In this context, I expect insurers’ pricing to reflect this reduction in risk. I would welcome a proposal from the FCA on how to ensure the market works effectively in this respect and expose anyone who fails to meet our expectations.
I request that the FCA produce another report no later than the end of October with updates on the insurer’s risk modelling, the adoption of ABI/BIBA industry data standards and any changes in commissions and building insurance pricing. We must continue to strain every nerve to protect tenants from exploitation. I am grateful for your continued support in this vital endeavour.
I copy this letter to the Director General of the CMA and to the Economic Secretary of the Treasury.
Right Honorable Michael Gove MP
Secretary of State for Upgrading, Housing and Communities
Minister of Intergovernmental Relations