Strengthening leaseholder protections over fees, charges and services: consultation

2.7 Better information about insurance

101. For many leaseholders in multi-occupancy buildings, buildings insurance makes up a considerable share of their service charge and is required under the terms of their mortgage. Buildings insurance also protects leaseholders in the event of losses, typically to the structure of the building or in common areas, for example in the event of fire or flooding.

102. Landlords will usually take on the task of insuring the building, often employing a managing agent to arrange the insurance who will in turn employ an insurance broker. Brokers usually work on a commission basis, typically negotiated with insurers. Landlords and managing agents are also typically remunerated by brokers sharing their commission with them for their work arranging and managing insurance placements.

103. This supply chain can incentivise landlords and managing agents to choose insurance brokers who secure a product that is not necessarily the best value option for the leaseholder but offers the highest commission return to them. The Financial Conduct Authority (FCA) published a report in 2023 into broker remuneration in multi-occupancy buildings and found that brokers’ absolute level of remuneration had risen by 40% between 2019 and 2022. It also found that brokers were often unable to articulate what insurance-related services or benefits of value were provided by the parties they were sharing commission with – including landlords and managing agents.

104. In response to these findings, the FCA updated its regulations in January 2024 to strengthen leaseholder protections and transparency. The update ensures that insurance firms must act in leaseholders’ best interests, treat leaseholders as customers when designing products and cannot recommend an insurance policy based on commission or remuneration levels. Firms are required to disclose policy information to their customer and ensure their insurance policies provide fair value.

105. Given these issues with the procurement of buildings insurance products and its significant cost for leaseholders, it is vital that there is greater transparency for leaseholders about the insurance being purchased on their behalf so that leaseholders can challenge the reasonableness of insurance costs if they wish to. Greater transparency should also incentivise landlords and managing agents to act in the best interests of leaseholders and seek the best value options when managing and arranging insurance.

106. Currently, Section 30A of the 1985 Act allows leaseholders to request a summary of their insurance policy from their landlord and to inspect the insurance documents, but landlords have no duty to proactively share this information with leaseholders if it has not been requested. New FCA rules require insurance brokers and insurers to share more information with the contractual customer of the insurance, with the intention that this is passed on to leaseholders. However, as the customer is usually the landlord or managing agent and may not be FCA-regulated, the FCA cannot require that the information is passed on.

107. Section 60 of the 2024 Act amends the Schedule to the 1985 Act. This places a duty on landlords to provide information proactively on the insurance policy to leaseholders within a period which will be specified in secondary legislation. This will ensure that all leaseholders are receiving detailed information about their insurance policy without having to request it from managing agents, landlords or insurance brokers.

108. Improved transparency on insurance also complements a different measure in the 2024 Act which has been consulted on separately. This measure, if enacted, could address the incentive model whereby landlords or property managing agents working on their behalf receive a portion of the building insurance broker’s commission for insurance related activities. This can incentivise them to choose brokers on the basis of remuneration received rather than best value for the leaseholder.  

i) Information to be provided to leaseholders

109. The FCA introduced new rules that came into effect on 1 January 2024 which mean that FCA-regulated insurance brokers (intermediaries) and insurers are required to provide detailed information to contractual customers on the following areas:
     1. features of the policy including: the type of insurance, main risks insured, excluded risks, excesses, significant features, term and duration of the policy and benefits, and the insured sum;
     2. total policy premium at the building level and the amount of insurance premium tax and Value Added Tax;
     3. remuneration which brokers are receiving, as well as remuneration they pay to third parties, including managing agents and landlords;
     4. information about potential conflicts of interest;
     5. the number of alternative quotes obtained and explanation of why they recommended a particular policy.
110. Given that leaseholders are not typically the contractual customer buying the building insurance, the FCA rules require the broker or insurer to give a clear instruction to the customer (typically the landlord or managing agent) to pass this information to the leaseholder. The leaseholder can also ask for this information directly from the broker or insurer, if it has not been provided to them by the landlord or managing agent.

111. We consider the new FCA transparency requirements are a significant step forward and at a minimum we think landlords should have to provide leaseholders with the information that brokers and insurers provide them (or the managing agent) under the FCA rules.

112. However, we consider that there is a case to go further. Conflicts of interest between different parties in the chain organising and arranging insurance has been raised as a particular concern by leaseholders and campaign groups. The FCA rules currently require that insurance brokers and insurance firms, as FCA-regulated firms, declare a conflict if:
     1. the firm (insurance broker) has a direct or indirect holding representing 10% or more of the voting rights or capital in a given insurance undertaking;
     2. a given insurance undertaking or its parent undertaking has a direct or indirect holding representing 10% or more of the voting rights or capital in the firm;
     3. a firm is representing the customer or is acting for and on behalf of the insurer.
113.  If we simply replicate the FCA rules, landlords and managing agents would not need to declare any conflicts of interest they may have with the broker or insurer. We therefore propose that landlords are also required to declare any conflicts of interest between themselves or managing agents they employ and insurers and brokers. 

114. Furthermore, we are interested to understand if there is a definition of conflict of interest that may cause concern to leaseholders, which better captures relationships between the different actors involved in choosing, arranging and providing buildings insurance.

115. Alongside considerations around conflict of interest, we also propose that the landlord will have to provide to leaseholders information about how they can make a claim on the insurance, whether that be directly to the insurer or by notifying the managing agent or landlord. The FCA rules do not require that the insurer and broker include this in their disclosure to the customer.

116. We would welcome views on whether the disclosure required by the FCA, alongside considerations around conflict of interest and making clear how a leaseholder can make a claim, provides leaseholders with sufficient information to understand their building insurance and challenge costs if they think it is unreasonable.

117. Our starting point is to have no exemptions for landlords to comply with the duty to provide insurance information, aligning with the proposal of the service charge demand form (see section 2.2). Leaseholders have a clear right to understand the insurance policy being purchased on their behalf. However, we would welcome views on whether there should be any exemptions at this stage from complying with this proposed approach.