Briefing: Brokers could be ‘on thin ice’ where commission sharing is concerned

The regulator, government and the judiciary are aligned on changing a set of rules that have long served to cut the beneficiaries of an insurance policy out of important decisions on where to source their protection.

Back in 2022, soon after I joined Insurance Times, I wrote about how leaseholders in multioccupancy buildings were being shafted by rules which meant that, while they paid for their building’s insurance via service fees to a building management agent, they had no input in the buying process.

To add to this injustice, both insurance brokers and insurers at the time were implicated in taking larger fees for providing this insurance to pay outsized commissions to managing agents and freeholders. 

Thankfully, since 2022, this particular issue has been improved somewhat.

The Leasehold and Freehold Reform Act 2024 received royal assent on 24 May, for example, but core changes to rules around insurance contained in section 59 will require secondary legislation to take effect.

This requisite legislation is being moved forward by government however, and, once implemented, will significantly restrict the ability for these commissions to be paid. 

The FCA has also issued new rules around commission transparency, especially in communications around its concerns with the motor finance market.

From the beginning of 2024, the regulator also brought in rules to require insurance firms to “act in leaseholders’ best interests, treat leaseholders as customer when designing products and will be banned from recommending an insurance policy based on commission or remuneration levels”. 

And, on the legal side, legal letters have been issued to four of the UK’s largest freeholders as part of a leaseholder group class action claim to recover unlawfully charged insurance commissions. 

Leaseholder Action, which is organising the claim as the representative of effected leaseholders, noted that thousands had already joined the group action.

Thin ice

It is no longer a question of whether this practice will be made illegal, but when – and that point is swiftly approaching. 

In its Annual Insurance Review 2026, law firm RPC highlighted broker commissions as an issue to look out for in 2026. 

In the report, the firm explained: ”Commission transparency will remain under the microscope. The Supreme Court’s decision in Johnson v FirstRand Bank and the Court of Appeal’s decision in Expert Tooling and Automation v Engie Power reinforce that informed consent requires disclosure of all material facts about commissions – not just generic references, that the materiality threshold is ‘a low one’ and the customer’s sophistication is not determinative. 

“When this is coupled with the Consumer Duty’s fair value requirements, brokers should expect more searching questions from clients and insurers on how commission structures relate to customer benefit and how conflicts are managed.” 

Brokers should have already been aware that this practice butted up against the edges of what was acceptable under Consumer Duty regulations, but the judgments in these recent cases serve only to reinforce that dodgy commission practices must be phased out – and quickly. 

Branko Bjelobaba, principal at compliance firm Branko, added: ”The FCA’s motor finance commission compensation consultation signals the regulator’s willingness to intervene where disclosure and value are in doubt. 

“For brokers, the watchword is preparedness. They should ensure commission disclosures are clear, completed and consistently evidenced, be ready to supply amounts and structures to commercial customers on request, review fair value assessments and product governance documentation and update client-facing materials and staff training so informed consent is demonstrable. 

“Any broker sharing commissions on residential insurance could be treading on thing ice and insurers must be more robust in ensuring that the leaseholder actually benefits from the arrangement. 

“Otherwise, commissions being paid or demanded are excessive and premiums could fall. Once we have a definition of permitted insurance payments this will legally ban sharing and this commissions will have to fall as any insurance-related work done by the freeholder or property managing agent will have to be charged directly to the leaseholder.”