Managing agents in the firing line for “secret commissions”

Scrutiny of insurance commissions requested by Michael Gove could have a devasting financial effect on manging agents, who may also be disqualified from FCA-authorisation and RICS membership if they are found to have taken so-called “secret commission”.

The housing secretary has taken a dim view of commissions paid to freeholders, landlords and managing agents in multi-occupancy buildings.

Gove published the letter he sent to Nikhil Rathi, the chief executive of the Financial Conduct Authority from 19 April 2023 where he expressed his concern at the “role of commissions in significant premium increases” and asked that the FCA “take immediate enforcement action against those brokers and managing agents that cannot demonstrate their commissions represent fair value, where they are regulated by the FCA and by RICS.”

Richard Glover, partner, JMW Solicitors, said: “Once again Michael Gove is taking on the fight on behalf of leaseholders and this time, he intends to expose and stop the practice of managing agents, landlords and freeholders taking commissions from insurers and commercial brokers as he believes this is inflating insurance premiums payable by leaseholders.

“This move comes as another blow to residential managing agents who are already under pressure in the current economic climate, as leaseholders in managed developments and the government itself target them as a result of industry practices on “secret commission” on building insurance policies.”

Gove hopes to bring an end to what he sees as “unfair practices” within the industry and wants changes to be implemented by the Autumn of this year.

Glover added: “The concern here is that leaseholders are not aware of the “secret commissions” and that as a result of them being paid, the Government believes that leaseholders, in effect, are paying over the odds for insurance. The problem has been exacerbated by rising insurance costs resulting from the building safety crisis, higher premiums have resulted in higher commissions.”

According to Glover leaseholder building insurance could be the next big thing for opportunistic claims management companies. Indeed, if managing agents don’t disclose commission payments then they can be challenged.

He added: “We have become aware of several companies which are now actively pushing these claims on social media which will inevitably raise awareness amongst the leaseholder and legal community. There have always been claims pursued by leaseholders in relation to excessive insurance premiums and there have been several high-profile cases on this issue in recent times, however now Mr Gove is now publicly taking on the practice of “secret commissions” we expect such challenges to become more prevalent.”

“This could have a devasting effect on manging agents particularly as such claims can go back several years. These issues are fact-sensitive and require careful consideration to understand the true legal exposure.”