Landlords overseeing properties in England and Wales, particularly those subject to substantial service charges, are facing mounting pressure to disclose significant sums of “secret commissions” amassed over the years through arrangements for buildings insurance.
According to experts, these covert commissions, paid to landlords ranging from City investment funds holding freeholds to managing agents, have amounted to tens of millions of pounds annually. These arrangements have transpired without residents’ knowledge, resulting in inflated service charges.
Typically, a broker facilitates an insurance policy for a residential development, subsequently dividing substantial commission payments, sometimes tens of thousands of pounds, with the property manager or freehold owner. The aggregate commission can soar as high as 60% of the premium cost borne by leaseholders.
This call for transparency on commission collection intensifies following recent revelations by the Observer regarding allegations of widespread service charge misconduct across various developments, including those marketed as affordable.
Under new regulations introduced by the Financial Conduct Authority (FCA) as of December 31 last year, insurance companies are now obligated to furnish leaseholders, upon request, with details of any commission paid for policies commencing or renewing post that date. Housing Secretary Michael Gove has committed to outlawing such commissions.
Neil Holloway, founder of M2 Recovery, an insurance specialist, condemned the longstanding practice of clandestine commission payments to landlords and agents as “disgraceful.” He remarked, “They have exploited it for every penny.”
Liam Spender, a 40-year-old solicitor, stumbled upon a series of undisclosed insurance commissions while challenging his annual service charge of approximately £5,000 for his two-bedroom flat in the St David’s Square development in London’s Isle of Dogs.
Spender uncovered that the property manager was obligated to transfer the bulk of the commissions received for the buildings insurance policy to an investment fund, ARC Time Freehold Income Fund, which held the freeholds of the development.
In a property tribunal case, Spender alleged that between 2018 and 2020, the fund pocketed 85% of the buildings insurance commission, totaling £114,290. Subsequently, the fund conceded to Spender’s challenge, waiving a portion of the commissions prior to the hearing early last year.
Spender claimed in a tribunal statement that he estimated the fund had amassed £5.2 million in building insurance commissions from 2017 to 2020, based on an analysis of the fund’s financial records. Time Investments, operating the ARC Time Freehold Income Fund, did not respond to requests for comment.
Spender remains embroiled in disputes over other bills within his contested service charges and advocates for other landlords to disclose the commissions they’ve garnered. “Freeholders have viewed leaseholders as cash cows to exploit at will. It’s effortless profit for them,” Spender asserted. “It’s akin to the wild west, where laws are optional, and there are endless avenues for exploiting service charges due to the opacity surrounding expenditure.”
FCA analysis from April last year revealed commissions totaling £80.7 million over three years and nine months among 16 firms handling multi-occupancy buildings insurance. The report highlighted the significant impact of these commissions on insurance premiums and the financial burden placed on leaseholders.
Gove criticized this as “completely unacceptable,” characterizing it as indicative of a failing consumer market. He now proposes legislation to prohibit such payments, currently undergoing parliamentary scrutiny.
Ministers are facing mounting pressure to assist leaseholders, with some reporting annual service charge hikes exceeding 40% this month. Over 1,000 individuals nationwide are threatening to withhold payment, citing exploitation by landlords.
The Department for Levelling Up, Housing and Communities affirmed, “Our leasehold and freehold reform bill will establish a fair and transparent system by banning building insurance commissions from being paid to freeholders and managing agents.” This initiative is part of a broader effort to fortify protections for leaseholders and enhance their rights.
The FCA stated, “We have amended our regulations to explicitly mandate insurance firms to furnish policy information to leaseholders, including details of any commission paid. Our regulations also prohibit firms from proposing or endorsing policies based on commission levels.”
