By Harry Scoffin
The City regulator is facing calls – long made by Leasehold Knowledge Partnership – to close a loophole that allows building owners to inflate insurance premiums, of which commissions as high as 72 per cent are being dumped on unsuspecting flat leaseholders.
On Wednesday, the Independent reported that “LKP wants the Financial Conduct Authority to tweak its rules around insurance to recognise leaseholders as parties to buildings insurance policies taken out by freeholders. For years, the FCA has resisted the change.”
Now Andrea Coscelli, chief executive of the Competition and Markets Authority, a consumer watchdog, has been urged by a troika of Liberal Democrat politicians to help flat owners “already standing at the edge of a precipice” by cracking down on “bribes and hidden commissions” where Financial Conduct Authority has failed to do so.
Responding to the Independent, an FCA spokesperson admitted it was “aware of issues” surrounding leasehold buildings insurance and claimed it was doing work in this area, but did not elaborate.
Pointing to new rules the FCA has introduced on “fair value”, the spokesperson committing the FCA to adjusting its ICOBS regulations to obligate building owners to enshrine leaseholders as a joint insured party on the contract – a minor text change that would empower service charge payers to seek better deals by entering the insurance market.
Currently, brokers often refuse to find quotes for leaseholders and tenants’ associations whose sites are not under resident control.
In their appeal to the CMA, Lib Dems Sarah Olney, MP for Richmond Park; Lord Newby, leader in the House of Lords; and Rabina Khan, councillor in the London Borough of Tower Hamlets, the local authority with the largest number of leaseholds in the country, referenced a 2018 letter from Bank of England governor Andrew Bailey, then FCA head, which warned insurance bosses of “significant risk of consumer harm” should they continue their pricing strategies.
The politicians also highlighted an FCA report that found evidence showing that some household pricing practices are “leading to some identifiable groups of consumers paying significantly higher prices than other identifiable groups of consumers with similar risk and cost to serve characteristics”.
In resolving individual cases that are raised with the charity, LKP has observed a sharp distinction in the costs borne by flat leaseholders who control their site’s management and therefore procure their own buildings insurance policy, and those captive consumers living under an external freeholder and unable to appoint the service provider nor control service charges. The latter pay substantially more, with hidden commissions a major part of their premiums.
As the Independent reported:
“There is no legal obligation for the freeholder to disclose to leaseholders how much mark-up they add to the cost of the premium, which can be as much as 72 per cent. Commission rates of 20 per cent are common.”
Damning the FCA with faint praise, the letter written by Ms Olney and colleagues, carried in the Independent, argued that, although the City regulator is “well intentioned, its policy reach and regulations are not potent enough to protect leasehold consumers because leasehold consumers are not the named insured on record.”
Instead, Ms Olney and colleagues applauded the Competition and Markets Authority – which LKP sees as the most effective body, alongside the Law Commission, in tackling leaseholder exploitation – for the “long-needed and bold stance” that characterised its February 2020 update report, which identified the “same structural defects that enable third-party freeholders, insurance brokers and managing agents to occupy a conflict of interest position when placing buildings insurance for leaseholders and to exploit this position, seldom without any fear of retribution.”
“The CMA is well placed to deepen its investigation and to take action against freeholders, landlords, insurers, brokers and managing agents who engage in concealment of the true premium pricing from leasehold consumers.”
Despite the FCA’s £600 million a year budget, it has taken no action on leasehold save for a note on its website dated April 2021. Entitled “Buildings insurance for leasehold properties”, it merely states that the regulator expects its firms to be “meeting all our applicable rules and take account of any wider legal obligations (e.g. under landlord and tenant legislation) that are relevant to taking out this insurance cover”.
In the summer LKP met the FCA with its MP patrons Sir Peter Bottomley, Justin Madders and Sir Ed Davey, at which the Rendall and Rittner offshore captive insurer was discussed.
By contrast, this year alone, the CMA, which lacks fining powers, runs on a budget of £120m which includes capital expenditure, and has a chief executive who has voiced dissatisfaction at the toolkit he and his officials must contend with when confronting consumer scandals, has been relentless in securing tangible improvements to leaseholders’ lives.
The body has pressured plc housebuilder Countryside into expunging toxic ground rent doublers from existing leases; insurer-cum-ground-rent-punter Aviva into striking out doubling and RPI-linked rent clauses and refunding affected customers; and developer Persimmon into supporting a right-to-buy scheme to empower its house lessees to secure their freeholds at a cut-down price.
Meanwhile, in resisting an alteration to its ICOBS rules to have leaseholders treated as consumers, the FCA, according to Ms Olney and colleagues, are presiding over the concealment of “bribes and hidden commissions”, a situation that has been brought to their attention by leaseholders of an unnamed development in east London who have reason to believe they are paying substantial secret profits.
In their letter to Mr Coscelli, the Lib Dems explained:
“… not only have [they paying leaseholders] been spurned by the recipient of bribes and hidden commissions but also by a big name insurer and an FCA-regulated broker, all who shield behind a technicality that appears in the FCA ICOBS rules that the leaseholder is not the ‘customer’ under the FCA rules notwithstanding that none deny that the leaseholder is the ultimate payer.”
“A building insurance policy that carries a financial reward offered to the placer of the insurance contract becomes irresistibly seductive, especially when England has a property title regime which permits hidden commissions being baked into the insurance premium and allowing the costs to be passed through the service charges account for the leaseholders to pay.”
Zurich said in response to the report in the Independent of a case study, where the premiums for one block went up by 400% in a year despite others with a higher risk profile experiencing a substantially lower increase, that it “did not have influence over how the cost was allocated to individual leaseholders”.
This is not the first time that Zurich has featured in a media story concerning commissions, with the Sunday Telegraph in August reporting that at a cladding-afflicted development in Bristol, the insurer allowed a commission for the freeholder, also E&J, of nearly 10 per cent.
A Zurich spokesperson told the paper that “we actively monitor commission levels to ensure they are appropriate, regularly negotiating with our brokers to control them across our portfolio”.
LKP can reveal that Zurich UK have a policy of not divulging information on commission or remuneration fees to the paying leaseholders who do not place the buildings insurance.
Leaseholders have found themselves reliant on the openness and transparency of brokers including Marsh & Arthur J Gallagher when it comes to finding out what commissions are being shared between the broker and landlord or entity placing the insurance.
The Independent also investigated insurance practices of Ballymore, the Irish developer that keeps the freeholds to its sites even after the last apartment has sold, with Karryn Beaumont, of New Providence Wharf, the Blackwall, east London scheme that caught fire in May, sharing that the freeholder cut its commission of 20 per cent to 6.1 per cent after the blaze.
Ms Beaumont told the paper she had established that the broker for the policy at New Providence Wharf was collecting around 4.5 per cent in commission.
A wave of negative publicity and protests orchestrated by aggrieved Ballymore leaseholders has forced the company to repudiate commissions and move to a fee-oriented model of procuring buildings insurance which, according to the Independent, “will be based on the amount of work it has to do to get the quote”.
In a statement, Ballymore said it manages its properties “entirely in the interests of leaseholders and not with a view to profit” and charged commission at a level below the maximum suggested by the Association of British Insurers.
“It is designed to be a not-for-profit revenue, used only to help deliver management services across our portfolio,” a Ballymore spokesperson said.
“Nevertheless, we continually seek ways to lower insurance costs. This includes all Ballymore properties moving to a fee-based system in 2021/22, which is anticipated to reduce costs still further as fees will not fluctuate when insurance premiums go up.”
The Liberal Democrats letter to the CMA can be read in full here: Re: Unfair practices in the insurance market affecting flat leaseholders
Related posts:
LKP’s response to the Financial Conduct Authority report on leasehold buildings insurance
Insurance insiders call for an end to secretive leasehold insurance commissions following Canary Riverside ruling
Leaseholders pay up to 60% more for buildings insurance because of secret commissions, reports The Times
Note to Mr Gove: FSA was warning of ‘reputational risk’ in not cracking down on secret leasehold insurance commissions 17 years ago!
Rendall and Rittner … no insurance commissions, but it owns an offshore ‘captive’ insurance company making a 40% profit on leaseholders’ premiums
Leaseholder and ex-Number 10 advisor to David Cameron issues call for reform of property managers after Richard Davidoff case
Having queried commissions charged by Peverel Management Services Ltd Trading as Peverel Retirement and their Sister Company Kingsborough Insurance Services Ltd in 2013/13 it came to light each Peverel Development was being charged the commissions added on top of both Development Insurance Cover and Terrorism Cover.
Peverel and Kingsborough became companies of Firstport Ltd.
The information regarding the commissions paid is no longer provided within the Income & Expenditure Account, which I believe is a requirement of regulations.
I received a printout from Kingborough Insurance showing the commissions paid from 2000 to 2013.
What was surprising was there were 3 lots of commission paid?
2007/08 Commission to Kingborough of 33.05% – £1,187.15.
Commission to Oval Brokers of 3.45% – £123.92
Commission to Oval Brokers of 5% – £5.62
Total commissions of £1,316.69 for a premium Sum Insured of £2,176,590,
The companies have all changed names:-
Peverel is – Firstport Property Services Ltd
Kingsborough is – Firstport Insurance Services Ltd
Oval is – AJ Gallagher Ltd
It is believed these commissions are unnecessary and are perks between connected companies?
Buildings Insurance has been the kingpin of unscrupulous freeholders for the past circa twenty years!
In 2004, following enactment of Right to Manage (RTM), under terms of the Commonhold & Leasehold Reform Act 2002, this lucrative cash cow for unscrupulous freeholders first came under threat.
In 2002, the market annual premium for our own premises was c. £7,800 p.a.
Along came an unexpected freehold buyer in breach of right of first refusal (RFR). To this day with continuing denial of RFR, freeholder remains in breach (criminal) while we wait on Michael Gove et al to enact “easier and cheaper” lease extensions and/or Commonhold, which according to the Law Commission should make RFR redundant. We hope and wait on this parliament and Michael!
In any event, in 2002, our illegal and criminal freeholder charged leaseholders an extortionate Insurance Premium of £23,400 p.a – 3.5 times market quotation. We finally resolved this by going to the old LVT and won.
Today, in 2021, seventeen years later, our annual premium is c £15,500 = still significantly less and notwithstanding intervening claims record since 2002.
In 2004, when freeholders increasingly found this insurance scam threatened, they moved on to the manipulation of Ground Rent instead. What hitherto had historically been a relative peppercorn quickly became a new and unregulated income stream – leading to “informal” lease extensions (we should not forget the great and gifted Louis Burns here).
It is time for Michael Gove to sweep this freehold extortion racket out of England & Wales once and for all (and in this parliamentary year), and introduce stiff fines and prison sentences for the criminals who continue to populate this industry. (while playing criminal mayhem with the ordinary brick and mortar investments of the electorate)
I believe the Commission on Insurance paid at Ravenscroft Development and Chamberlayne Walk, should be removed from the figures along with the Management Fee and the 10% paid to Firstport for Overseeing Major Contracts?
NOTE – Originator Landlord who do nothing but act as a middleman, brings in the Broker, they receive the most Commission, I believe these commissions are passed back to the Landlord or their Agent for using them in the first place, corruption personified?
At Ravenscroft Development 17 years of wrongly charging Management Fees. Firstport has owned up to.
They have provided figures to correct the Management Fee which the lease states are 10%, not the c.20% charged.
To arrive at the TOTAL ACTUAL COST PER ACCOUNT Firstport has added the commissions paid as EXPENDITURE?
Pluss the wrong VAT was included in the TOTAL ACTUAL COST PER ACCOUNT.
Also, Firstport has added on the years the Landlord and Managing Agent were connected companies, therefore VAT should have been exempt?
Also, other items where Firstport has been paid commissions have also been added to increase the TOTAL ACTUAL COST PER ACCOUNT thereby reducing the amounts to be refunded.
So far Firstport has made seven attempts to RIGHT the WRONG and failed on each occasion by providing INCOME as iEXPENDITURE, regarding correcting the Management Fees that should have been paid.
Firstport will again be providing further figures where these Commissions as Income should have been removed from Expenditure.
The 17 years of continued Error by Firstport will also see 8% Interest added on top which has been estimated to date at over £70k?
This along with the overpayments of C.£60k means each of the 74 leaseholders would be entitled to C,£2k each?
I believe the Commission on Insurance paid at Ravenscroft Development and Chamberlayne Walk, should be removed from the figures along with the Management Fee and the 10% paid to Firstport for Overseeing Major Contracts?
NOTE – Originator Landlord who do nothing but act as a middleman, brings in the Broker, they receive the most Commission, I believe these commissions are passed back to the Landlord or their Agent for using them in the first place, corruption personified?
At Ravenscroft Development 17 years of wrongly charging Management Fees. Firstport has owned up to.
They have provided figures to correct the Management Fee which the lease states are 10%, not the c.20% charged.
To arrive at the TOTAL ACTUAL COST PER ACCOUNT Firstport has added the commissions paid as EXPENDITURE?
Pluss the wrong VAT was included in the TOTAL ACTUAL COST PER ACCOUNT.
Also, Firstport has added on the years the Landlord and Managing Agent were connected companies, therefore VAT should have been exempt?
Also, other items where Firstport has been paid commissions have also been added to increase the TOTAL ACTUAL COST PER ACCOUNT thereby reducing the amounts to be refunded.
So far Firstport has made seven attempts to RIGHT the WRONG and failed on each occasion by providing INCOME as Expenditure, regarding correcting the Management Fees that should have been paid.
Firstport will again be providing further figures where these Commissions as Income should have been removed from Expenditure.
The 17 years of continued Error by Firstport will also see 8% Interest added on top which has been estimated to date at over £70k?
This along with the overpayments of C.£60k means each of the 74 leaseholders would be entitled to C,£2k each?
Seb, First Posting didn’t show as sent?
In times gone by some standard leases would contain a clause where Management Fees would be restricted to 10% of the Total Development Expenditure.
This was done with the intention of protecting leaseholders from extortionate expensive Management Fees which leaseholders had little control of.
Generally, this worked reasonably well until the more unscrupulous, greedy emerging investment class of Freeholders and Managing Agents saw a way of
increasing Revenue Streams in c.1985/86 by simply inventing work, thus increasing Total Development Expenditure and therefore the Management Fees.
The introduction of Un-Necessary:-
Roof Inspections
Asbestos Surveys
Tree Surveys
Repainting every 4 years
Window Replacements
Warden Call Systems
Fire Systems
Lift Replacements
Lighting Updates
Monitoring
S20 Contracts 10%
Commissions Paid by Leaseholders
Insurance Re-Valuations
Account Preparation Fees
Asset Preparation Fees
Many other items were introduced to increase the Total Expenditure which at the same time increases the Management Fees.
As a result of consumer pressure, the leases with the 10% Management Fee Clause went out of favour to be replaced by the ones we are more familiar with.
Nevertheless, there are many especially pre-1990 leases that still contain this clause. Leaseholders should check to see if their lease does contain such a clause, which can often be found under schedule 6.
If it does and you have been charged more than 10% of expenditure, you are entitled to a refund of excessive charges.
In the case of the Ravenscroft Development which is managed by Firstport, the initial response was to claim that the lease did not apply to Management Fees.
This was followed by a rebate calculation that was wholly inaccurate and weighted to minimise the correct refund due.
As with the Chamberlayne Rd Development, the excuse given was that “errors were made by the previous Managing Agent” when in FACT Firstport was always the Managing Agent but changed names after the Price Fixing.
Insurers require periodic flat roof inspections by a competent roofer or surveyor and this is a valid service charge expense as is reinstatement revaluations three yearly and indeed asbestos surveying and a host of other items about which your commenter complains. Passenger Lifts for example are subject quite rightly to stringent inspection requirements and renewals of parts in accordance with recommendations.
Good, Mr Dover, that you comply with safety requirements – roof inspections, asbestos surveying etc. It is great to know that there are managing agents out there concerned about the welfare of the TENANTS.
Have you declared yourself, the nature of your interest in leasehold? Or are you another Stephen who used the anonymity of the internet to post here without declaring himself?
Ben, I remember a Ben Dover in naughty films he would bend over backward to help as you have done thank you
What I am saying is that regardless of whether or not the freeholder or the leaseholders organise management of a block of flats, or similar, there is quite a lot of money that has to be spent on shared amenities from water tanks, hydrants, lift, roofs, communal lighting, submains, walkways, emergency equipment, private drains, the list is not short, and not all Managing Agents and their Landlord clients are a rip off. Most sensible ground landlords are delighted for leaseholders to take over management of the blocks and to remain in the wings so that if the arrangements break down either due to disputes betyween leaseholders or the inability to elect officers to serve they can and will step in to continue to operate the service charge mechanism. It’s not a revolution and storming of the Bastille that is required and service charges should not disappear once the leaseholders have control because services do need to be provided, but long term commitment on behalf of leaseholders to run their own developments.
Ben, nobody has ever said that service charges should disappear. My view is for professional managing agents to collect and manage communal costs, which are necessary for the professional and proper management of premises and, who for the first time, will be regulated through government legislation.
The myriad list of communal problems/services (particularly in older premises) should not, as at present, remain in the hands of unscrupulous gangsters, who more often acting criminally, continue to levy extortionate demands on unsuspecting leaseholders. We must sweep away this present system forthwith, and it is for that we urgently await enactment of the Law Commission/CMA/Housing Committee proposed new legislation by this parliament in this parliamentary year.
Do you agree?