Is the broker pledge on leasehold commissions a load of not much?

On Sunday, the Financial Times revealed how the government had convinced five brokers to sign up to a pledge, meaning they would stop sharing commissions with parties that place or arrange buildings insurance, such as property managing agents.

The five brokers also committed to capping any commissions at 15%.

It garnered this headline from the FT: “UK insurance brokers back move to cut costs for leaseholders”.

Other publications, including this one, went with similar, positive headlines, patting the brokers and the government on the back for the sacrifice they are making to reduce the cost of insurance for leaseholders.

Well done, all round.

But is it? Looking at the release sent out by the Department for Levelling Up, Housing and Communities, there are some questions to be answered. Mainly: “What real difference does it make?”

Parameters of the pledge

First, the pledge is only relevant for buildings above 11m tall, with known fire safety issues. How many buildings are there that reflect this?

According to DLUHC figures, at the end of August 2023, 96% (470) of all identified high-rise residential and publicly owned buildings in England had either completed or started remediation work to remove and replace unsafe Aluminium Composite Material cladding.

Only 22 have not yet started and, of those 22, two are vacant, so do not represent a risk to resident safety, six buildings were identified after 31 December 2021 and eight additional buildings were identified during 2021.

It is not known what scope the government means when it says “known fire safety issues”. Does this just mean it has the ACM cladding? Or could it mean there is a faulty fire alarm?

But if the figures are just to mean those that have not yet started remediation, then only 22 high-rise buildings would be relevant for this pledge.

The brokers (not) involved

Then, we look at the brokers who have signed up to the pledge.

Brown and Brown, PIB, Bridge, WTW and Lockton are the five to have signed up so far, with the government saying it is speaking with others to sign them up over the next few weeks.

Graeme Trudgill, CEO of the British Insurance Brokers’ Association, said: “We will continue to work with relevant members to highlight how important this pledge is in the context of multi-occupancy properties with fire safety issues.”

This represents a tiny pin-prick of business.

Insurance Post source

And Duncan Carter, CEO of Brown & Brown UK retail, commented: “We have worked closely with officials at the Department of Levelling Up, and through Biba, to agree a way forward for this thorny issue.

“It is right that the insurance industry plays its part in providing affordable protection for leaseholders in high-rise buildings with material cladding or other fire-risk issues, and we hope others will follow our lead.”

But sources say these five have very small books when it comes to the kind of insurance the pledge is addressing.

One told Insurance Post: “This represents a tiny pin-prick of business.”

Post has asked the British Insurance Brokers' Association, and two of the brokers involved, how much business this pledge would affect. None of them were able to provide a figure.

The fact that, just a few months ago, Carter wrote a piece for Post warning that a ban on paying commission to property-managing agents could backfire for leaseholders, could well be representative of just how much the participating brokers will be affected by the pledge.

Unintended consequences

There are some very obvious omissions from the list of participating brokers, which raises more questions. The likes of Marsh, Aon, Gallagher and Howden have all decided against pledging. Why?

Sister publication Insurance Age reported how Gallagher has refused to back the pledge in its existing version over concerns about "possible unintended consequences".

What could those unintended consequence be? Aside from the obvious financial hit. One reason could be that most leasehold risks are part of a portfolio for these brokers.

One broker could have 10 risks within one portfolio, and maybe one of those is a higher risk because it has fire safety issues, and the other nine are lower risk because they don’t have any fire safety issues.

That higher risk would be offset by the other, lower risks as the broker looks at the risk profile of that whole portfolio rather than the individual parts of it.

This pledge would force a different way of working out remuneration, which could mean brokers would have to pull that higher risk out of the portfolio, and either pool it with other higher risks or leave it in its own portfolio. This could increase the overall risk profile of that portfolio, as there are no longer nine smaller risks offsetting the one higher risk.

Government interference

Then there is the precedent this sets, with the government effectively telling brokers how much they are allowed to earn from these deals.

Granted, charging up to 62% commission on leasehold insurance is abhorrent, no company could ever have done so much work to warrant that level of commission.

However, most leaseholders will argue that 15% is still too much.

But, for the government to step in – when the FCA has already laid out plans to deal with these kinds of practices – to force brokers to cap commissions at 15% is maybe allowing brokers to put in less effort and reduce its level of service.

Then you ask the question: "What will they come in and do next? Where does the industry draw the line?"

And really, will this pledge make much of a difference to how much brokers are making?

Capping commission and no more to PMAs

In the FCA report on broker commissions, which was released in April, commission levels had varied from between less than 10% to a maximum of 62% in one case.

Then, in a Treasury Select Committee hearing in July, Johnny Timpson of the Financial Services Consumer Panel said he felt the market average of 16% to 32% commission on buildings insurance was “a better benchmark” for the amount brokers get paid.

So, if a broker was receiving around a 20% commission on policies, then giving some of that commission to a third party, it may work out that the broker will only end up with around 15% of commission anyway.

This pledge might just mean that the broker cuts out the middleman, still ending up with 15% commission without the need to pay any third-party part of the commission they earn.

And let’s face it, any money paid to a third party will be rebranded as a fee now. So, realistically, not much will have changed.

What should have happened?

The announcement should have been about one thing and one thing only: transparency. If the government wants to address these practices, then it should have enforced transparency between brokers, third parties and leaseholders.

The third pledge in the announcement makes some effort to do this.

It said: “We commit to disclosing our commissions to leaseholders in accordance with Financial Conduct Authority regulations (as permitted to do so) if requested and work with third parties to deliver transparency on fees to leaseholders.”

But the most important part of that is the “as permitted to do so”. This means that brokers will only be able to share information around commissions for third parties if those third parties have given permission for that broker to do so.

So, realistically, how many third parties are going to give that permission? Exactly. Only the ones acting fairly.

If you want to address this properly, force all those companies involved to disclose all the information relevant to leaseholders when asked.

And this should not just apply to buildings with known fire risks. Premiums have not just gone up for those leaseholders living in buildings with ACM. All leaseholders in high-rise buildings have seen astronomical premium increases since Grenfell.

It should apply to all leaseholders.

Or the more drastic solution: abolish leasehold altogether.

Smoke and mirrors

While this announcement, on the surface, looked as though it was a big win for leaseholders, and a big sacrifice for the brokers involved. Realistically, it appears to be all smoke and mirrors.

It looks to be a good chance of PR for the government and the five brokers in question, ahead of the Kings Speech on 7 November, without really committing to much.