A lot of the Bill relies on secondary legislation coming through at a later date, meaning that we must all wait for many of the details of individual policies and cannot fully scrutinise them now. Last week we heard from the Minister that the commencement will be in 2025-26. In January last year, the Secretary of State, Michael Gove, announced his intention to ban freeholder and managing agent insurance commissions—or “kickbacks”, as they are colloquially known—that fatten leaseholders’ insurance premiums and pad their service charges. He was right to do so.
In recent years, there has been a series of truly horrific stories about leasehold building insurance, including bribes, kickbacks and commissions galore. When the Financial Conduct Authority did its investigation into this recently, it found that broker remuneration had increased by nearly 40% in three years, with at least 80 million leaseholder-funded commissions going to other parties. Brokers passed on more than half the commission to the freeholder, or the managing agent in 39% of cases. Brokers could not provide any evidence to support the claim that those payments were fair value. The FCA says:
“The level of commission is high, with typical commissions of 30%-49%, and … up to 62%. We have also seen that remuneration is shared with the freeholder or property managing agent (PMA) in many cases, with 37-42% of commission being paid away”.
That is damning. The commissions are clearly excessive and totally out of kilter with other classes of business.
The total commission going to freeholders or managing agents can be as high as 60% of the cost of the premium paid by leaseholders. This comes back to my core problem with leasehold: the people paying the bills do not have control over those bills and lack the ability to fire the rip-off companies they have to deal with—unlike flat owners under different arrangements almost worldwide, who have far more power and control. As the FCA observed, policies are being
“selected on the basis of commission rather than product quality. There is a lack of pressure on freeholders, PMAs and insurance brokers to search for the policy that offers the best value-for-money or to switch to better-value policies which may benefit leaseholders. This is because they can recover costs from leaseholders. We have seen instances of freeholders, property managing agents and insurance brokers having commercial arrangements with particular insurers which benefit them but not leaseholders”.
That brings me to my concern. I am doing this on behalf of leaseholders countrywide and campaigning for insurance professionals who have a conscience. The crux of this matter is: are the Government not inadvertently entrenching commissions by rebadging them as “transparent fees” and having them disclosed?
I am no lawyer, but I understand that if a secret profit has been made, every penny is owed to the wronged party—the principal under the law of agency. If the Government were to force all the kickbacks to be disclosed, as the Bill proposes, would that not just weaken the position of leaseholders, because they would no longer be secret profits? Another point is that freeholders hold money on trust for leaseholders, so if they have made a secret profit they open themselves up to legal challenge on breach of fiduciary duty.
How will the Government decide the level at which the permitted insurance payment is set? How will that be set and who will be in charge? What will be the mechanism? Will it be someone’s will, or will we have an algorithm that does that? Is this not just a backdoor for freeholders to extract more money from hapless leaseholders?
5.45 pm
In theory, a broker should do the legwork and get the best quotes for buildings insurance. Managing agents are already remunerated through the annual management fee that leaseholders pay, and they will usually also do the claims handling. So why do freeholders then get any money from the leaseholders’ insurance? My Amendment 79 would ensure that there is a backstop so that, if freeholders are getting any income from wrongdoing, leaseholders could still challenge it, despite the fees having been compulsorily disclosed to them. Having disclosure should not reduce the legal rights that leaseholders already have to challenge fees. All I am doing is providing clarity to the eventual definition of “permitted insurance payments”, so that
“any payment which arises, directly or indirectly, from any breach of trust, fiduciary obligation or failure to act in the best interests of the tenant”
is excluded from the scheme. That will ensure that freeholders can no longer abuse their position of power—as the one placing the insurance policy—to profiteer from captive leaseholders who must pay the premium.