Now angry leaseholders kick back at the brokers

Published 01st Mar 2009

Flat owners could be paying up to double the best rates for buildings cover, thanks to hidden commission being shared out between brokers and managing agents


Owners of leasehold flats are paying up to double the market rate for buildings insurance because brokers are paying "kickbacks" to the property agents who manage their homes.

In a bid to secure business, some brokers are choosing the insurer that pays the most commission, instead of the company that offers the best value - and then sharing this commission with the managing agent.

Insurers who pay the most commission are often also those who charge the highest premiums. Although leaseholders bear the extra cost, they rarely find out about the inducements because there may not be an invoice and the inducements do not appear on their service charge statement or other documents.

Insurance broker Neil Cook, of Ember JD Insurance, told Cash he is being approached by increasing numbers of leaseholders who are being charged significantly above the going rate.

"I see a lot of inflated premiums for blocks of flats where it just doesn't add up, and there is no way the broker has sought the best deal," he says. "Sometimes it is as much as double but, typically, the premium is about 30% above what you would expect to pay."

One leaseholder, who does not want to be named, learned he was paying over the odds only after he and other residents took over the management of their south London flats in October last year.

"When we got hold of the paperwork we saw that the company that managed the block was paying £6,632 a year for buildings insurance," he says. "Without too much difficulty, we managed to get the premium down to £3,731."

He claims that when he sought quotes from insurance brokers, two out of the eight he called asked if he wanted a payment for himself. "I was surprised they were suggesting I take a payment from them that would not appear on any of the paperwork," he says. "I wasn't doing this just for myself and, of course, I refused."

To see whether or not this experience was exceptional, Cash approached eight insurance brokers on the pretext of insuring a block of 20 flats.

Two refused to make any payment to secure business, one claiming such an arrangement would "contravene the rules and be unfair to leaseholders". Another refused on the grounds that her firm earned too little commission to make the practice viable.

Six brokers did, however, agree to share commission and told us payments to managing agents, which two referred to as "kickbacks", were common.

"We can sometimes pay you as much as 20%," said one broker at a large firm that specialises in property insurance. "You give us a cheque for the total cost on our invoice and we give you another cheque for however much we agree you're going to get. It's as simple as that."

"If you want to split the commission it can mean a higher premium," warned another north London broker. "It depends how much you want to charge your leaseholders."

A broker with a Kent-based firm explained: "We can earn commission of between 10% and 28%, but the higher commission comes with some hefty premiums. We can go for the higher premium and share the commission with you if you want."

We were reassured that the payment did not need to appear on any invoice. The amount could simply be deducted from the invoice, or, if we preferred, the broker could send us a cheque or make a Bacs payment with no paperwork.

Both brokers and managing agents that arrange insurance are regulated by the Financial Services Authority. Its rules say a firm must, if asked by a customer, disclose any commission it receives and "pay due regard to the interests of its customers and treat them fairly". But, because leaseholders are not the policyholders (that is usually the freeholder), the FSA does not consider them to be "customers" of either brokers or managing agents, so they are not protected. "Mostly, leaseholders would be considered third parties to the contract and our rules are of limited assistance to them," said an FSA spokesperson.

An alternative option for leaseholders who think they are being overcharged is to take their case to the Leasehold Valuation Tribunal (LVT), which adjudicates on whether service charges, including insurance costs, are "reasonably incurred". Last year, the LVT received 2,141 applications concerning insurance charges and other leasehold management issues, up 20% on 2007.

However, flat-owner Bilal Farid warns that simply getting access to insurance paperwork can be difficult. He wanted to see details of costs after discovering that he, and other leaseholders, were being charged far above the market rate to insure their block of 10 flats.

"The managing agent kept refusing to send me a copy of the insurance schedule, so eventually I went round to their offices," he says. "They got agitated and first of all refused to show it to me and then said it was in a different office."

Farid has still not seen the document, but in March last year, he and his neighbours took over the management and, with just a few phone calls, cut the annual premium from £2,700 to £1,875. Leasehold law specialist Nicola Stewart, of Rooks Rider solicitors, says leaseholders should persist when information is withheld. "Your annual service charge statement should specify the cost of insurance and if it does not, you have a legal right under the 1985 Landlord and Tenant Act to ask for this information."

A spokesperson for the British Insurance Brokers Association said: "Brokers are permitted to rebate a proportion, or all, of the commission they receive from an insurer to the client if they choose. Leaseholders are able to challenge the insurance costs advised to them. "


What are my rights?

Can we get rid of our managing agent?

Legislation designed to protect leaseholders was introduced in the 2002 Commonhold and Leasehold Reform Act, and its biggest leg-up is the "right to manage" (RTM); in other words, you can wrest control of the daily running of the block of flats from the landlord (or freeholder) who appointed the managing agent.

So how does it work?

You and your neighbours band together to set up an RTM company and then serve formal notice on the landlord who must then, in a reasonable period, hand over responsibility. How your new RTM operates is, of course, down to you: you could hire a new managing company or share responsibilities between owners.

What are the downsides?

A smooth transition will depend on how prickly the relationship is between leaseholders, the existing management and your landlords: if the latter wants to, they can challenge your action in a tribunal. As well as the possible cost of legal advice, you pay for any costs incurred by the landlord in the transfer. But, more importantly, you and your fellow leaseholders must work together, and wholeheartedly support the RTM. If any flat fails to pull its weight or contribute financially, difficulties can be tricky to resolve.

Is commonhold an option?

Probably not. Commonhold, a new status where leaseholders and the landlord throw their hat into the ring to jointly own and run a block of flats, has been a spectacular flop: so far, barely 120 home or flat owners have swapped from leaseholder status to that of new freeholder, according to the Campaign for the Abolition of Residential Leasehold. It's largely down to the right of freeholders to say "no" to any proposal, and most - unwilling to give up the lucrative ground rent and fees - do so. The government is to review ways to make commonhold more appealing.

Source: ' The Observer '

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