Unlawful insurance distribution

The month Paul Robertson looks at how property managers may be committing a crime by distributing insurance without appropriate legislation.

Following recent legislation changes any property manager involved in block insurance is likely to be committing a criminal act if they don’t have appropriate insurance regulation in place. With effect from the 1st October the insurance distribution directive (IDD) clarifies the rules as to the need for regulation and who is responsible for checking it.

If you in any doubt as to whether or not you need to be regulated then you can find a simple guide to the subject in a recently published RICS document on regulation. Whilst written as “guidance for the designated professional body rules 2018” which apply to RICS members who are regulated by RICS it does contain a simple guide in appendix A which gives considerable clarity on the matter of who needs insurance regulation.

In essence for property managers if you or your firm receives a remuneration for insurance then you almost certainly need to have a route to regulation. And the word remuneration is defined by the IDD to mean that you (or your firm) receive a commission or a salary for distributing insurance. That doesn’t however mean that if your firm doesn’t receive commission you don’t need regulation. If part of the service you provide includes certain involvement with distributing insurance then that is part of the service the firm is remunerated for and part of the salary paid to some employees includes the role of distributing insurance. So a firm stating on their website they arrange insurance (to any extent) or that includes provision for involvement of insurance in their client terms of business is basically stating they need to be regulated.

The important point here is that insurance regulation applies to any firm or individual distributing insurance to a client for which they get paid. It is not intended to stop a group of friends in a pub discussing their experience of certain insurance providers or who gave them the cheapest motor insurance quote.

There are a number of options in respect of appropriate regulation for property managers:

  • A firm can become directly regulated with the FCA (formerly the FSA).
  • A firm can become an ‘Appointed Representative’ (AR) of a directly regulated firm such as an insurance broker. This allows the AR to act under the umbrella of the directly regulated firm which assumes responsibility for the compliance of the AR. This is a cost effective option for smaller property management firms.
  • The final option for a firm is to be regulated by a ‘Designated Professional Body’ (DPB). Examples include solicitors under the Law Society and accountants under their professional body. Property managers who are members of the Royal Institution of Chartered Surveyors (RICS) can apply to become regulated as a DPB of the RICS scheme. This is a sensible option for eligible RICS members as it provides a cost effective route to regulation with a rule book which is far simpler to navigate as it is specific to the activities of RICS members. Not all RICS firms have DPB status, only the ones who have joined the scheme.

It is easy for anyone to check the regulatory status of a firm.

The FCA have a facility on their website or alternatively they publish a phone number on their website, enabling customers to check the firm they are dealing with is regulated. However under the IDD there is an obligation on insurance brokers to check the status of managing agents in the distribution chain.

Firms who don’t have an entry on the FCA register can expect to see insurance brokers refusing to deal with them.

There are a number of exemptions but the most significant in the leasehold market is that of the policyholder. Despite the fact that the freeholder is effectively arranging insurance on behalf of all of the leaseholders, because they are doing so due to a contractual requirement in the lease, the rules exempt them from the need to be regulated. The same is true for RTM companies and RMCs.

A firm of property managers can effectively become the customer and gain advantage from this exemption by becoming company secretary. Effectively this is a loophole and under the IDD any firm using this route to not have insurance regulation in place could come under severe scrutiny if they are receiving commission.

There is a final route to regulation that is commonly misunderstood in the guise of introducer. The IDD remove this category across Europe but in the UK the FCA have elected not to remove it yet. A firm of managing agents can be an ‘Introducer Appointed Representative’ (IAR) of a directly regulated firm such as an insurance broker. This allows the IAR to introduce business to the regulated firm and the regulated firm will then deal direct with the customer on the IAR’s behalf and pay introduction commissions to the IAR. However very strict procedures need to be in place to ensure property managers do not become involved in the distribution of insurance and there is a strong argument that introducer status should be removed from the UK rulebook as it can easily lead to regulatory failure.

Ultimately you may be wondering why this matters?

There are two answers to that question. If you are a client, a managing agent without proper regulation in place is denying you from some of the customer protection to which you should be entitled and if you are a managing agent then you may not sleep so well knowing that the insurance regulator has this on their radar and it’s a criminal offence.

Regular readers are probably well aware that the IDD also introduces a requirement for anyone involved in the distribution of insurance to have a minimum of 15 hours CPD per month. To this end I have published Robertson’s insurance principles for leasehold flats and I am delighted to announce that the first online CPD assessment modules are now live.


Paul Robertson is Managing Director of 1st Sure Flats and Midway Insurance

Email: paul@midway.co.uk

Tel: 0345 370 2848

 Reviewed: July 2019