Insurance Costs Under Review: Government Publishes Response on Permitted Insurance Fees

Consultation Findings

The consultation attracted 836 responses. These were primarily from leaseholders (80%), with the remainder comprising landlords, managing agents, insurers, brokers, legal professionals and representative bodies.

One key question was whether ‘permitted insurance fee’ should be clearly defined by a list of specific insurance-related activities for which landlords and managing agents would be permitted to charge remuneration, with fees for anything outside of those being illegal.

The reaction to this proposal was split across all respondents, with 48% in support and 48% opposed.

Response Breakdown
Most of the landlords and freeholders who responded disagreed with the proposed approach, concerned that it could be too rigid to reflect the varying complexity of insurance arrangements. Instead, they preferred a more flexible approach that could adapt to different building types and lease structures. There was also consensus among them that existing regulations imposed by the FCA and RICS were sufficient.

Leaseholders were divided:

• 47% supported a defined list of activities, arguing that this would improve transparency and clarity, thereby reducing the risk of abuse by making costs more easily scrutinized.

• 51% opposed such a list as futile, arguing that secret commissions can already be challenged at common law and that the policy would merely ‘legalise commissions that are currently illegal’.  

Like the leaseholders, property managing agents had conflicting responses:

• 45% were in support, with some supposing that it would reward good faith actors in the market and indicating that they had already adopted a fairer fee model.

• 55% were opposed, generally agreeing with landlords and freeholders that such a definition would lack flexibility.

The Government’s Response

Contrary to leaseholders’ concerns that permitted insurance fees would merely legalise commissions that are currently illegal, the government indicates that this proposal aims to prevent excessive commissions that, as flagged by leaseholder respondents themselves, are missed by the current legal framework. 
Though acknowledging landlords’ and managing agents’ dissent on grounds of flexibility, the government pointed out that many managing agents were already using a similar fee model, suggesting that its proposal for permitted insurance fees is ‘compatible with varying insurance needs’.
In the light of this, the government confirmed that it intends to proceed with its proposals for section 59 by introducing secondary legislation to define permitted insurance fees, but this will only follow further collaboration ‘with industry to establish what activities are required and what remuneration is proportionate’ for insurance.
In the meantime, the statutory provision in section 59 will remain dormant.
 

Conclusion

While the response stops short of imposing immediate limits on insurance fees, it signals the government’s clear intention to reform the system and improve transparency.
The next phase will depend on collaborative work between the government and industry stakeholders. Leaseholders, freeholders, and managing agents alike should keep a close eye on the development of secondary legislation in the months ahead.

Mark Vinall, Partner, Ashley Wilson Solicitors LLP