Broker Remuneration – FCA intervention looking likely after government review of post-Grenfell property insurance sector

In January 2022, Michael Gove, Secretary of State for Levelling Up, Housing and Communities, called on the Financial Conduct Authority (FCA) to assess the causes of the “crippling costs” of year-on-year price increases for insurance premiums and the marked restriction in coverage available for medium- and high-rise properties, after the Grenfell fire. Practical recommendations for the industry, government and regulators to tackle these concerns were demanded and these have been considered and debated at length in the legal and construction press ever since.

However, on 28 January 2022, and rather quietly, the FCA issued a “Dear CEO letter” to insurance brokers and London Market insurers, making clear its intentions to ensure that these “products provide fair value and premiums fairly and accurately reflect risk” and setting out its planned approach to collecting information in order to investigate. On 10 May 2022, the FCA published a letter from Sheldon Mills, FCA Executive Director, Consumers and Competition, to Michael Gove, detailing the progress of its work to date and the options for intervention the FCA is considering (“the letter”).

Options

In the letter, the FCA acknowledge that price increases could be a result of reduced capacity for multi-occupancy buildings, or insurers charging high premiums to insure them, due to perceived issues with building safety and quality. In turn brokers have submitted additional commission costs follow due to the increased work required in this environment to ensure policyholders have adequate cover. If price rises are a legitimate reflection of increased risk, the FCA state that it would be unlikely for it to intervene.

However, of concern to the broking industry is the fact that the FCA has flagged in its letter several potential harms relating to product distribution, including concerns that property managing agents and insurance brokers may be selecting insurance policies that maximise their own commission/fees, rather than those that offer the best value for the policyholder. To the extent that the FCA concludes that pricing increases are being driven by these types of “non-risk elements” (i.e. distribution costs and a lack of competitive pressure on pricing), it is very clear that regulatory intervention will follow.

Potential interventions discussed by the FCA to address the harms identified include considering how it can extend protection to leaseholders (because the freeholder property owner buys the insurance and the FCA rules do not extend to leaseholders). The interventions discussed include putting obligations on insurers and brokers to ensure that the products they offer provide fair value directly to leaseholders, and that commission should not conflict with leaseholders’ interests. In addition, the FCA discuss the possibility of providing leaseholders with enhanced information disclosure about the freeholder’s decision-making on purchasing insurance (for example, the policy purchased and possibly information about what other policies were available, making it easier for leaseholders to challenge unfair insurance costs).

(Re)Focus on Remuneration

However, the most headline grabbing of interventions mooted by the FCA is the possibility of the regulator creating rules to limit broker commission. This could include capping the level of commission that can be paid or prohibiting the practice of commission being based on a percentage of the premium.

In the post-covid and current economic climate where household finances are being squeezed, the FCA will be keen to demonstrate action where fair value is not perceived to be found. The letter acknowledges that such action would require “strong justification” due to its “potential for adverse unintended consequences”. Absent firm conclusions from the FCA’s research (which are expected to be published in July), it is currently unclear whether such justification will be found but, given that it is being publicity discussed by the FCA at this stage, we must assume that it is at least a possibility. In the event intervention is deemed warranted, it appears that the FCA have in mind recommending that they are given a specific statutory power or duty to intervene in brokers’ remuneration, in a way that is similar to the powers that already exist in the high-cost short-term credit and claims management sectors.

Brokers have been bemoaning the increased regulatory burden that has been placed upon them for some time, arguing that a disproportionate influx of inappropriate regulation has caused many businesses to fail; and that this, in turn, has reduced customer choice and competition.  In the circumstances, it will be widely hoped within EC3 that any FCA action in relation to controls on commission should be an absolute last resort, and that only if the FCA were to find extensive industry failure should they intervene.  Anything more proactive and there may well be considerable backlash.