2024 has been a big year for the insurance industry. With so many regulatory and legal updates affecting the leasehold sector, insurers for residential blocks have been kept on their toes.
Many of the changes made this year have put great emphasis on fairness, transparency and clarity for leaseholders. Insurance premiums and commissions have long been a contentious issue for leaseholders, with many at the mercy of building owners and brokers who lacked integrity.
Here we will discuss the progress made this year and whether things have improved for leaseholders collectively paying for buildings insurance via their service charges.
The Financial Conduct Authority’s Regulation Update
The first change to come about in 2024 was the Financial Conduct Authority’s regulation update which came into effect on 31st December 2023:
“From the new year, insurance firms will be forced to act in leaseholders’ best interests, treat leaseholders as customers when designing products and will be banned from recommending an insurance policy based on commission or remuneration levels. Insurers will also be required to ensure that their insurance policies provide fair value to leaseholders and provide important information about their policy and its pricing, including the detail of any commission paid for leaseholders.” FCA
In summary, the guidance ensured that insurers treated leaseholders as stakeholders during the purchase of buildings insurance. They were now expected to consider leaseholders throughout their processes and in their policy design, to ensure fair value and consideration to those footing the bill.
The changes also restricted remuneration to parties in the distribution chain to ensure if premiums paid by leaseholders included remuneration (for example to a managing agent or freeholder) that the premium continues to offer fair value. Disclosure documents are also now a requirement which are provided to the policy arranger with the expectation that the document will be passed to the leaseholders.
Commission Changes
The FCA found during their 2022 review into the market that almost a third of the cost of insurance premiums being paid for by leaseholder could be made up of commission and fees. In some cases, premiums were inflated by unscrupulous freeholders agreeing to higher premiums in return for a share of the brokers’ commission.
“Following a review into broker remuneration practices, the FCA expects brokers to immediately stop paying commissions to third parties (including property managing agents and freeholders) where they do not have appropriate justification and evidence for doing so in line with our rules on fair value.” FCA
The Disclosure Document
The FCA’s rules also stated that firms must now provide detailed information re the product and their services once a policy is purchased. It must be compiled and provided to the policy buyer, with clear instructions that it must also be passed on to all leaseholders. If it is not passed along as instructed, leaseholders are able to contact the firm to request their assistance.
The details must include:
- A summary of the features of the policy, including main benefits, coverage and exclusions of the policy, duration and sum insured
- The policy premium (where the policy covers a portfolio of buildings, firms must disclose the premium at building or dwelling level)
- The remuneration that any authorised intermediaries receive for arranging the insurance, as well as remuneration they pay to other parties (including unregulated Property Managing Agents and freeholders)
- Information about potential conflicts of interests, such as ownership links between the intermediary and the insurer, and about the insurers with whom the intermediary may place the policy
- The number of alternative quotes they have obtained (with further details of these to be provided on request) and a brief explanation of why they have proposed or recommended that the policy is in the interests of both the freeholder and leaseholders
The Leasehold and Freehold Reform Bill
The Government’s “Leasehold and Freehold Reform Bill” focuses on bolstering the rights of leaseholders when it comes to collective enfranchisement and lease extensions, but also affects the insurance industry due to three components:
- Requiring transparency over leaseholders’ service charges including a standardised, comparable format
- Replacing buildings insurance commissions for managing agents, landlords and freeholders with transparent administration fees
- Requiring freeholders who manage their property to belong to a redress scheme, so leaseholders can challenge them if needed and scrapping the presumption for leaseholders to pay their freeholders’ legal costs when challenging poor practice
A Summary of the Effects
For insurers, the changes have required an industry-wide adjustment. As well as always considering leaseholders as equal stakeholders, insurers must ensure that administration fees are standardised and clearly communicated and provide the disclosure document required at the point of sale.
Buildings insurance is a necessity, and freeholders and property managers are right to seek a comprehensive coverage policy that suits the needs of the building, but they will now need to actively consider the cost of the policy to get the best deal for their leaseholders.
Looking Ahead to 2025
Further regulatory measures are expected in the coming year. Following the initial transparency reforms, the government is likely to examine whether current measures have gone far enough to have a meaningful impact on premiums.
Potential next steps could include mandating independent reviews of insurance policies or even fostering a more competitive insurance marketplace to drive down premiums. There is also talk of establishing a dedicated watchdog or ombudsman for leaseholder insurance disputes, providing leaseholders with a clearer path for challenging unfair charges.
