The Financial Conduct Authority recently proposed new rights and protections for leaseholders to improve the transparency of the multi-occupancy leasehold buildings insurance market. The tragic events of Grenfell caused a fundamental reappraisal of risk in this market, with leasehold buildings insurance premiums having risen significantly since that event and leaseholders individually facing substantially higher costs.
The challenge faced by many leaseholders currently is that they have little say on buildings insurance, either in relation to coverage, customer service or price. Under the FCA’s plans, leaseholders would be redefined as ‘customers’ of buildings insurance and would explicitly require insurance firms to act in their best interests. Furthermore, insurance firms would be barred from recommending a policy based on commission or remuneration levels.
These headline proposals seem sensible. The challenge of defining ‘customers’ is not new, and is an issue we also raised in relation to the FCA’s new Consumer Duty. In this case, the question is whether the individual who arranged a contract with an insurer has a right to claim directly from that insurer, or is simply a potential beneficiary from an insurance claim. As an organisation with a mandate to secure the confidence of the public, we think it’s important to meet the reasonable expectations of the public as a whole. On that basis, the FCA’s proposals seem appropriate.
While these changes are important ‘under the bonnet’ reforms that subtly change the regulatory rights of leaseholders, there are also other, more prescriptive changes in the FCA’s reforms around transparency of remuneration, which we also agree with. For example, while landlords and property companies may incur costs in arranging insurance, and it may be reasonable for some of these costs to be passed to leaseholders, this should be done in a transparent way as a standalone fee and not as commission. This is because landlords act as both purchasers and distributors of insurance, which is a very strong conflict of interest.
The move to improve transparency over commission payments to brokers is also desirable. While most consumers simply want to know what they are paying overall and the cover they are getting in return, they don’t seek or often need a breakdown of the costs.
The overall cost of insurance is the element that is most likely to drive competition in consumers’ interests, alongside matters related to the potential for claims to be paid, coverage and retention of no-claims bonuses. Therefore, the FCA’s decision to opt for an approach based on greater transparency rather than a ban on commission altogether is appropriate, given that commission payments fund valuable advice on suitability of cover and quality of service given during the claims process.
These are of course only proposals. The FCA’s consultation closes in early June and we expect the final policy statement in the Autumn.
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