Six months ago, an independent consultant called several England and Wales managing agents operating in the block management space, asking what ‘fair value’ meant to them in the context of insurance remuneration. Almost all agents replied with blank faces. We knew there was work to be done.
A better deal for leaseholders
Against a backdrop of calls to ban commission sharing between brokers and managing agents (and brokers and landlords), the FCA is using the “carrots and stick” approach to promote best practice. The carrots have been provided by way of a campaign to raise awareness of the pressure leaseholders find themselves under, especially those in mid- and high-rise buildings tolerating fire safety deficiencies and elevated insurance premiums. Insurer and broker organisations, BIBA and ABI, played their role in this awareness campaign, although the energy for a fairer deal for leaseholders found its origin from within the Department of Levelling Up, Housing and Communities (DLUHC).
In September, the FCA finalised rules that made it perfectly clear that new measures would be arriving in January 2024 aimed at a better deal for leaseholders paying insurance premiums. “Insurance firms will be forced to act in leaseholders’ best interests…and will be banned from recommending an insurance policy based on commission or remuneration levels.”
An outsider to the insurance industry, or block management sector for that matter, may consider such statements as obvious. Yet disappointingly, they were necessary to remind the regulated insurance sector that achieving fair value for premium-paying leaseholders had already been introduced into the FCA rulebook (see PROD 4, October 2022).
Fair Value
The concept of ‘fair value’ should in no way be alien to anyone buying insurance on behalf of others. In block management circles, property managers are fully aware that how they spend leaseholders’ hard-earned service charge monies can be scrutinised by the FTT. This is the same tribunal service that has regularly determined insurance commissions can be reasonable in amount and reasonably incurred, as long as there is justification. The best way of justifying insurance related remuneration is to do so in advance, proactively and in detail, minimising the risk of being hauled before the FTT.
Whether or not commission sharing is banned, to me, is a moot point when it comes to justifying such remuneration. The question to ask is: “Has the remuneration been earned? Does it represent fair value for leaseholders?” If you are sharing the broker’s commission or charging a fee to your client for insurance services rendered, demonstrating that you have been transparent and have earned the fee (or commission) are paramount.
When we sit down with our managing agent clients to have these initial ‘fair value’ conversations, they invariably leave the meeting with several reasons why they deserve to receive remuneration for regulated insurance activities. And they also understand how costly it is to maintain appropriate FCA-recognised regulation and adequate PI insurance for performing those activities. These two elements form the basis of a ‘fair value statement’, and your existing broker should have had conversations about this with you by now.
Plenty of carrots then. What about the stick? Regulators would rather the industry adheres to the rules, however wielding the stick has been necessary from time to time. History shows that the FCA will act against those regulated firms who have failed to follow the rules or principles of business.
FlatGuard
At FlatGuard, we have always followed the carrot approach. This has earned us praise from the UK government (with whom we have liaised closely this past year), alongside four other brokers, for our pledge to reduce the cost burden on leaseholders and promote transparency throughout.
Yes, commission sharing could be at risk. But your insurance earnings shouldn't be if you follow the rules and you are ahead of the game by adopting the right strategy with the right insurance partner you can trust. Insurance is an important service charge item and managing agents should be fairly remunerated one way or another for providing fair value.
Andre Backner ACII BA (Hons) Director, FlatGuard a trading name of Bridge Insurance Brokers Limited
