Wholesale insurance broker market study team
Competition & Economics Division
Financial Conduct Authority
25 The North Colonnade
London E14 5HS
Wholesale Insurance Broker Market – Study
This response to your consultation is on behalf of The Federation of Private Residents’ Associations, which as far as we know, is the only national body that represents the voice of leaseholders in England and Wales. We have over 500 member associations representing tens of thousands of individual leaseholders.
This response has been done so on the basis of our regular daily contact with our members who inform us of the problems they encounter in the leasehold sector and we have analysed those contacts so that we understand and can convey to you the problems in the insurance buying process from a leaseholders perspective.
We have a committee of over 30 volunteers and this response has been drafted using their expertise in addition.
As far as leaseholders are concerned, the whole insurance buying process for blocks of flats and similar situations is broken. The person that ultimately pays for the insurance is the individual leaseholder in a block of flats. This is charged to them via their service charges and in accordance with their lease.
There is a great deal of legislation sponsored by The Ministry of Housing, Communities and Local Government (formerly the Department of Communities and Local Government) to protect leaseholders and we would strongly urge the FCA to open discussions with that department who are at this moment reviewing their legislation in response to numerous problems involved in consumer protection relating to leasehold.
This organisation as well as many other groups, have been raising concerns over how insurance is arranged and dealt with by the insurance market for many years. We would particular refer you to your own response to a letter from our chairman of 17 April 2013, your response reference ISS10785139 dated 13 May 2013, goes to demonstrate the failure of regulation and the inability of joined up thinking and protection for leaseholders.
Previously the FCA has actively sought to avoid consumer protection to this group and we hope as part of the market review you will accept that protection and guidance should be to support the ultimate recipient of cover i.e. the leaseholder.
Because of the way the current market works leaseholders are also excluded from the Financial Compensations Schemes.
Historically, there were many abuses of the insurance purchasing process so as to add additional cost to leaseholders for the benefit of freeholders, managing agents and other intermediaries. Our members have frequently on challenging the cost of insurance purchased for them, found massive over-charging by the sector.
The basic requirement is a complete change in attitude that the purchase and supply of the policy should be for the benefit of the leaseholder not the person taking out the policy. Without this change there is the opportunity for the addition of extra cost.
Many freeholders and others have looked to buy not on the basis of what is the best for the leaseholder but what is the best for them, particularly in terms of their earning potential, be this through commissions, fees, administration charges and a myriad of other titles.
It is not unusual for premiums to be over charged by 50-100 per cent from the true premium that the insurer requires for the risk. We hear frequently of freeholders whose main reason for their ownership of blocks is because of the income they can earn from insurance. This distorts the whole property market and freehold property values in leasehold blocks. We are told a similar situation also occurs on commercial estates such as warehouse estates, although this is beyond our knowledge and expertise.
However, it is not unusual for the personal household insurance market to earn commissions in the 10-15 per cent range whilst in the market for blocks of flats, it is rare to find anything below 20-35 per cent range, and often more. The fundamental is that the differential is not justified by market factors but by the rip-off of the end consumer who only has limited chance to challenge.
Where blocks are owned by the leaseholders (normally after they have enfranchised or otherwise purchased their freehold or have exercised Right to Manage) they are able to make their own block purchase, the premiums charged are frequently lower than when they were previously purchased by the previous freeholder or managing agent. For our smaller members, the way the insurance market classifies block purchase as being business insurance rather than personal insurance by-passes much consumer protection law.
There are of course, many honest and respectable brokers and others in the market who do not engage in this practice.
One of the fundamentals continues to be who is the “client” and unless the FCA addresses this properly, failures in the market will continue.
Leasehold law has some protections but those involved in the abuse go to great lengths to hide information and put obstacles in the way. Even the briefest review of the decisions by the First Tier Tribunal Service (FTT) will demonstrate the problems faced and the frequency of overcharging.
Only a small number of cases go to the First Tier Tribunal Service because of the various barriers in the way of leaseholders going to tribunal and even when they do, the First Tier Tribunal Service only reacts to overcharging/large commissions included within insurance premium for business introduced or arranged by a Managing Agent but currently fails to do so when the same happens with insurances arranged by Freeholders.
This abuse we have seen estimated as costing leaseholders hundreds of millions of pounds per annum, although we ourselves have no supporting evidence of this figure. Commonsense suggests that as there are over 4 million leaseholders the figure has to be extremely large.
What we have seen is members paying £30,000 for a block policy being able to buy it for less that £15,000 on the open market.
As a market review we hope you will really look seriously at the whole issue.
We would be willing to work with you and others in the sector to take this process forward.
FPRA Voluntary Chairman