CMA asks the FCA to consider regulating freeholder commissions

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Property managing agents could be forced to disclose how much commission they and brokers make from arranging buildings insurance after the Competition and Markets Authority (CMA) found a lack of transparency was damaging leaseholders’ interests.

The CMA has also asked the FCA and government to consider if the leaseholder market is being properly regulated in its market study.

The report found that in some instances insurance premiums were distorted by high commissions being charged by property managing agents and freeholders and passed onto leaseholders. In some cases this was as high as 40%

Typically the leaseholders are given an invoice which does not explain how much commission property managing agents or freeholders earned. Leaseholders are also not told if the company purchasing insurance on their behalf has links to the broker they are buying it from.

In one example a freeholder arranged buildings insurance through an arm’s length insurance broker and an associate company, who between them collected commissions between 24% and 57%

When the leaseholders won their right to manage their property and changed brokers broker, they were able to reduce the cost of insurance by 30%.

The CMA concluded that the high commissions was leading property managing agents not to look for the best deal for their leaseholders.

It has proposed that property managing must disclose all information relating to the commission payments they earn.

The CMA wants the remedies on property managers to be implemented through codes of practice like the Royal Institution of Chartered Surveyors (RICS) and the Association of Residential Managing Agents (ARMA), which have the right to expel or fine members.

However the CMA did not have jurisdiction to make recommendations on property insurance organised by freeholders, who arrange the vast majority of buildings insurance with the cost passed onto leaseholders, and called on the FCA to step in.

CMA project director Douglas Cooper told Insurance Times: “There’s a gap in the regulation and leaseholders are picking up the costs of this.”

Insurance and brokers not unfairly profiting

Cooper said there was no suggestion that insurers and brokers themselves unfairly benefitted at the expense of leaseholders.

“We haven’t done an assessment of profitability for the insurance industry but we’ve had no suggestions that insurers and brokers themselves are the parties who are benefitting at the expense at leaseholders,” he said.

“Brokers and insurers just reflect the circumstances they’re in. They’re fully compliant with all regulations,” he said.

He urged the insurance industry to contact the FCA if it was concerned about how freeholders operate.

“If they think they can’t reasonably do anything off their own initiative because it would disadvantage them, I’d strongly welcome any wider comment or input to the FCA to highlight there is an issue here to be looked at,” Cooper added.