Plan Insurance Blog

Michael Gove’s Commission Ban Will Shake Up the Property Market

Michael Gove is on a mission to reduce insurance costs for leaseholders of multi-occupancy buildings. He says he “will consider all routes necessary to reduce premiums”. He is also forcing the hands of builders to fix unsafe properties.

The Secretary of State for Levelling Up, Housing and Communities, had said that when it comes to insurance for multioccupancy buildings he wanted to ban ‘unusually high broker commissions’. However, after a lengthy investigation into the supply chain, it is instead the income received by managing agents and freeholders that Mr Gove has in his sights.

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Who Pays For Blocks of Flats Insurance?

For multioccupancy buildings, choosing an insurance provider is often the job of either managing agents (the company hired to take care of the building) or the freeholders (the person that owns the building). Those living there, the leaseholders (that own the flats) or tenants, pay service fees which cover the premium of the insurance policy that the managing agent or freeholder has opted for.

It’s easy to see how this transaction could be vulnerable to abuse. Freeholders or managing agents would potentially opt for higher insurance premiums in exchange for a percentage of the premium as a commission or set fee. They would then pass the cost on to leaseholders or tenants with little transparency.

Leaseholders often don’t even get to view the policy, because it’s seen as part of the relationship between the freeholder and the insurance company. Leaseholders pay for this insurance as part of their service fees, so their payment is somewhat indirect.

Gove’s plans to make it right

In The Department for Levelling Up, Housing and Communities’ January 2023 statement Gove said that he would ‘take action to ban managing agents and freeholders from taking commissions when they take out buildings insurance’”. It’s a bold statement. He followed that he wanted to make service charges more transparent, and to empower leaseholders to see precisely what they are paying for.

Gove thanked the chief executive of the Financial Conduct Authority, Nikhil Rathi, for their September 2022 report that suggested interventions had to be made to improve integrity in the running of multioccupancy buildings.

Over the past three months, the FCA has been gathering data from insurers to look into their pricing practices. The regulator aim was to identify what has gone wrong in the market, and why residential leaseholders are suffering,

The findings of the Financial Conduct Authority

Over the past three months, the FCA has been gathering data from insurance companies to get an understanding of their pricing practices. They have been trying to identify why leaseholders are inevitably pulling the short straw.

Gove told the FCA’s Consumers and Competition Executive Director Sheldon Mills that he hopes they can collaborate to achieve this outcome.

Mills has said that regulatory powers can only go so far, and the government should take a more active role in the relationship between freeholders and leaseholders. Gove responded that he ‘acknowledges the limitations of the FCA’s regulatory perimeter’ and that he ‘will consider all routes necessary to reduce premiums, and I am hopeful that we can work together toward this goal.’

The British Insurance Brokers Association (BIBA) has been clear in its desire for “more transparent fees” and highlights brokers’ “important role in placing these difficult risks.” The FCA’s report states that “brokers retained earnings had reduced to an average of 13% in this area.” So reading between the lines it appears that in BIBA’s opinion “commissions and other payments received from “managing agents, landlords and freeholders” are where significant value is being lost out of the supply chain with relatively minimal benefit to leaseholders.

Gove makes building owners take responsibility for their properties

In another move against the power that building owners have over leaseholders and residents, developers recently received legally-binding contracts that will commit them to pay to repair their own unsafe buildings.

The government has set a six-week deadline for developers to sign a legal agreement, and they are warning that those who don’t sign will face significant consequences. In the spring, legislation will be brought forward to prevent developers from operating freely in the housing market if they fail to sign the contract.

It’s a bold move for Gove as Secretary of State for Levelling up, Housing and Communities. It comes on the back of the cladding scandal which was exposed by the Grenfell tragedy. These changes by the government attempt to avoid innocent households facing costly and unreasonable repair bills for severe, latent defects that have not been of their own making.

The contract requires developers to commit an estimated £2 billion or more for repairs to buildings they developed or refurbished over the past 30 years. Together with the Building Safety Levy, the property industry will pay an estimated £5 billion to make their buildings safe.

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