Landlords of developments in England and Wales where residents face hefty service charges face calls to disclose millions of pounds in “secret commissions” raked in over the years for arranging buildings insurance.
Experts say these hidden commissions, paid to landlords including City investment funds that hold freeholds and managing agents, have been worth tens of millions of pounds a year. The arrangements were made without residents being told and resulted in higher service charges.
A broker may arrange a policy for a residential development, but then split tens of thousands of pounds in commission paid by the insurance firm with the property manager or owner of the freehold. The total commission can be as high as 60% of the cost of the premium paid by leaseholders.
Pressure on landlords to disclose the scale of commission they collected comes after the Observer reported last weekend on allegations of “widespread service charge abuse” in many developments, including those marketed as affordable.
Under new rules introduced by the Financial Conduct Authority (FCA) on 31 December last year, insurance firms must provide on request to leaseholders details of any commission paid for policies renewing or starting after that date. The housing secretary, Michael Gove, has pledged to ban the commissions.
Neil Holloway, founder of M2 Recovery, an insurance specialist, said it was “disgraceful” that the practice of paying secret commissions to landlords and agents had been allowed to go on for so long. “They have milked it for everything they can,” he said.
Liam Spender, 40, a solicitor, uncovered a series of secret insurance commissions after challenging his service charge of about £5,000 a year on his two-bedroom flat in the St David’s Square development in the Isle of Dogs, east London.
He found the property manager was required to pass the bulk of the commissions it received for the buildings insurance policy to an investment fund, ARC Time Freehold Income Fund, which ultimately owned the freeholds of the development.
Spender alleged in a property tribunal case that between 2018 and 2020 the fund received 85% of the buildings insurance commission of £114,290. The fund conceded to the challenge on these commissions, scrapping an agreed chunk of them before the hearing early last year.
Spender said in a statement to the tribunal that he considered that the fund had received £5.2m in building insurance commissions from 2017 to 2020, based on an analysis of the fund’s financial statements. Time investments, which operates the ARC Time Freehold Income Fund, did not respond to a request for comment.
Spender is still battling other bills in his disputed service charges and wants other landlords to provide details of commissions they have collected. “Freeholders have seen leaseholders as cash cows they can bleed at will. It’s money for nothing for them,” said Spender. “It’s a wild west, and the laws are treated as optional. There are endless opportunities to exploit service charges because of the secrecy around how the money is spent.”
FCA analysis in April last year of 16 firms working on multi-occupancy buildings insurance found commissions of £80.7m over three years and nine months. Its report said: “This amount clearly impacts the premiums paid to insure multi-occupancy buildings, and the level of costs for the leaseholders who often ultimately bear this expense.” Gove said last year that this was “completely unacceptable”. He said commissions reflected “a market that is failing consumers” and now proposes to ban such payments in a bill going through parliament.
Ministers are under pressure to help leaseholders, with some annual service charge bills increasing by more than 40% this month. More than 1,000 people across the country are threatening to refuse to pay, with residents complaining they are being ripped off by landlords.
The Department for Levelling Up, Housing and Communities said: “Our leasehold and freehold reform bill will create a fair and transparent system for leaseholders by banning building insurance commissions from being paid to freeholders and managing agents. This is part of a wider, ambitious agenda that will strengthen protections for leaseholders and improve their rights.”
The FCA said: “We have changed our rules to explicitly require insurance firms to provide policy information to leaseholders including detail of any commission paid. Our rules also prevent firms from proposing or recommending policies based on commission levels.”
