Aamina Zafar examines the implications of a new ‘Dear CEO’ letter from the FCA to insurers
The regulator has warned insurance firm bosses and brokers to maintain high standards and improve accountability, after the Grenfell tragedy led to residential leaseholders facing spiralling costs.
The Financial Conduct Authority (FCA) has penned letters to chief executive officers working within the insurance market for multiple-occupancy residential buildings, to highlight concerns around hikes in insurance premiums for residential leaseholders living in buildings with dangerous cladding.
In the letters, Sheldon Mills, executive director for consumers and competition at FCA, reminds the profession that their products must provide fair value and accurately reflect risk.
In particular, he says insurance intermediaries must ensure the commission they receive has a reasonable relationship to the benefits their services provide and the costs they incur in providing their services.
In one of two versions of the letter, he writes: “Our rules require insurance intermediaries (such as brokers and property managers) to ensure they do not adversely impact the value of products they are offering. A key part of this is ensuring the commission they receive has a reasonable relationship to the benefits their services provide and the costs they incur in providing services.
“Where commission is based on a percentage of the premium, firms should be aware that higher premiums may lead to increases in the amount of commission which are not justified by the benefits provided or by higher costs incurred.”
The letters also stress that intermediaries must not be influenced to act against the customers’ best interests because of commission or other remuneration. This includes proposing a policy based on higher commission levels where another policy may better meet the customer’s needs.
The FCA’s letters emphasise that remuneration arrangements must be changed if they negatively impact the value of a product, or lead to a conflict of interests. They also add that intermediaries must provide clear information on the nature and type of remuneration they receive.
These rules apply both to remuneration they receive and also to remuneration they offer to other firms in the distribution chain, such as property managers – even those who are exempt from FCA authorisation.
Raising standards
Commenting on the letters, which were sent out at the end of January, Chartered financial planner Kusal Ariyawansa says the move is a valid reminder to raise standards through adequate research, explanations and disclosure.
Mr Ariyawansa, from Manchester-based Appleton Gerrard Private Wealth Management, says: “These letters re-emphasise the standards and accountability brokers and advisers must aspire to. They highlight the accepted facts that firms must not be influenced by higher commissions (due to higher premiums) while acting in the best interests of the customer, at [both the] renewal and new-business stages. [The FCA] adds that you need to take into consideration all (including novel) risks associated with such buildings and present these to underwriters in a timely manner, as many tenants pay for such products through their service charges.
“In summary, I see this as a reminder to raise standards even higher through adequate research, explanations and disclosure.”
In the letters, Mr Mills also warns insurance firms that while they often do not treat leaseholders as the customer, most leaseholders are the ones who actually pay for buildings insurance through service charges, even though they cannot shop around to find the best deals. That is why insurance manufacturers must ensure their pricing models are fair and based on a reasonable assessment of the risk posed.
Greater clarity
Despite the warning letters, Stacy Reeve, senior policy adviser at the Association of Mortgage Intermediaries, suggests that the industry’s efforts are likely to have little impact until the government provides greater clarity on how the cladding crisis is to be resolved.
She says: “Although the FCA’s ‘Dear CEO’ letters highlight actions insurers and intermediaries can take to play their part in reducing financial pressures on those living in multiple-occupancy buildings, until there is greater clarity from government on how the cladding crisis is to be resolved, industry efforts are likely to be constrained and have limited impact.
I have been particularly concerned to hear of cases where insurance premiums have escalated by over 100% year on year
“The government recently announced that the plan for a loan system for the remediation of buildings below 18 metres will be dropped, but failed to explain what should happen to the work or the bills for the work to make properties safe. It also announced a £30m fund to pay for the costs of installing an alarm system in buildings with unsafe cladding, removing the need for the extortionate costs of ‘Waking Watch’ measures. From an underwriting point of view, this may improve the physical hazard of a risk but is unlikely to give sufficient comfort that premiums and terms can be reduced or removed, given a property’s construction type is a key underwriting consideration and unsafe cladding as well as non-cladding defects identified by safety inspections remain.”
Premium hikes
This comes as housing secretary Michael Gove has ordered an investigation into the crippling premium hikes faced by leaseholders in buildings with dangerous cladding.
In a letter to the FCA last month (January), Mr Gove asked the regulator to review the buildings insurance market for multiple-occupancy residential buildings, together with the Competition and Markets Authority.
He wrote: “I have been particularly concerned to hear of cases where insurance premiums have escalated by over 100% year on year, leaving residents with crippling costs. It is clear to me that the insurance market is failing some leaseholders.”
Aamina Zafar is a freelance journalist
