All one has to do is review some of the postings on campaign website The Truth About Solitaire - a site where frustrated leaseholders can share their bad experiences of managing agents - to see just how frequently the matter crops up.
Managing agents typically give leaseholders no choice as to which broker provides cover for their block, and consequently contract their favoured broker, regardless of whether or not they provide a competitive quote. More often than not, these quotes are bumped up by sizeable commissions shared between the broker and managing agent.
The lack of obligation to find competitive quotes makes for perfect grounds for the managing agent to further exploit the leaseholders' position by heaping these commissions on top of the premiums, encouraged to do so by the broker to whom they stay loyal, and continue to offer business.
And all the while, the leaseholders, at whose door the cost of insurance falls, are oblivious to the on-goings between their managing agent and the broker, and ill-informed of their options with regard to how to improve the situation.
Both brokers and managing agents must disclose any commissions they receive according to Financial Services Authority regulation. Additionally, the FSA rules that firms must "pay due regard to the interests of its customers and treat them fairly." However, usually it is the landlord or freeholder, as the policyholder, who is considered the 'customer' - not the leaseholders. This leaves the leaseholders as effectively unprotected third parties, despite the fact that they are funding the insurance, and every level of commission along the way.
Worse still, a lack of transparency in the service charges leaseholders receive from their managing agent means the commissions go largely undetected. Commonly, brokers will not even require that the extra payments appear on an invoice, so leaseholders are completely oblivious to the practice.
However, a development in the property management industry empowers leaseholders to decide their broker for themselves and cut out commission on premiums. Companies providing 'Block Administration Services' as an alternative to a traditional managing agent's service have managed to secure substantial insurance savings for their clients.
With Block Administration Services, leaseholders can choose the broker that provides cover for their block. On average, clients save over 50% on their insurance premiums in moving to this new model for property management, amounting to a reduction of over £1000 per block.
Since the substantially reduced quotes are eminently attainable, it's reasonable to assume that the 50% or £1000 mark up that is typical with traditional managing agents is comprised almost entirely of commissions.
Measures are being taken to address the problem
Concerns over the increasing incidence of insurance-related malpractices by managing agents have led to attempts to limit the extent of and ease with which agents can glean commissions.
Firstly, leaseholders can go to the Leasehold Valuation Tribunal (LVT). This is a public body charged with adjudicating on matters concerning service charges, insuring buildings and the quality of services provided by managing agents. Leaseholders who have doubts over the 'reasonableness' of their service charges, including buildings insurance costs, can take the matter to the LVT. If applicants are successful, the LVT has the power to award them compensation.
In a recent landmark ruling, 126 families living in six apartment blocks in Nottingham were awarded a substantial sum after challenging the amounts they were being charged by their managing agent.
It was also discovered that managing agent had entered into an agreement to receive commissions worth 33.05% of total premiums from the broker and insurer for providing 500 estates in Britain with Buildings Insurance. The court ordered the managing agent to repay six years of insurance commissions to the 126 families.
However, managing agents' practices generally are not regulated by statute, and the law only requires that "costs incurred should be reasonable, for work or service of a reasonable standard," according to the Landlord and Tenant Act 1985 - with no special mention given to capping commissions. While it remains that there is no definition of "reasonable", there is always a chance that leaseholders may consider a ruling that doesn't go in their favour to be distinctly unreasonable.
Additionally, some managing agents are being forced by competitive pressure to offer leaseholders increased visibility of their accounts by providing clients with a unique block website where all transactions carried out on behalf of the block are published. Accordingly, leaseholders can keep track of payments made on behalf of the residential management company, and flag up any irregular looking sums.
And critically, insurance schedules detailing the declared value of the building and the sum for which it is insured can also be published on these block websites so that leaseholders can get directly in contact with brokers and ensure that they are getting a competitive quote.
Managing agents argue insubstantially that they are entitled to take these commissions
Managing agents argue that commission covers the cost of handling claims, but surely these costs should be covered by their general management fees, which themselves often make up a substantial proportion of leaseholders' annual services charges?
They also contend that they can in fact succeed in securing reduced premiums for leaseholders as they work with the same broker across a large portfolio of blocks and therefore can get reduced rates. However this is rarely the case as in actual fact most insurers will only insure on a block-by-block basis.
Recent research has revealed the shocking extent of commissions being taken by managing agents
On taking on new clients, companies from the Block Administration Services industry have discovered that rates of commission taken by traditional managing agents can reach 150% of the basic figure.
Among the industry leaders Urban Owners' clients is a six-unit new-build block in Swindon, whose insurance premium with their previous managing agent was more than three times what it has now been reduced to through the Block Administration Services model. Commissions therefore made up around 70% of the block's exorbitant £1878.72 annual premium, which has now been reduced to just £618.33 a year.
Worse still is the example of a three-unit block converted house in Hertfordshire, who were paying a monumental £1735.87 whilst with their managing agent. Using Block Administration Services, they have succeeded in reducing their annual premium to just £480.90, a saving of £1254.97 - the vast majority of which can be attributed to the elimination of commissions.
Companies providing Block Administration Services do not take commissions
So how is it that leaseholders who sign up to Block Administration Services can invariably achieve such drastically reduced insurance premiums which avoid commission?
Essentially, the Block Administration Services model doesn't allow for commissions. With this new approach it's the leaseholders who are in control of management decisions, and making the calls on which suppliers are appointed to the block, be it cleaners or insurance brokers.
As such, when it comes to insurance, there is no longer the opportunity for the managing agent to appoint their favoured broker from whom they can secure the largest slice of commission, at the expense of the leaseholders, since it is the leaseholders who have the final word on which broker is contracted.
With the Block Administration Services, an appropriate model is ensured, in that it is the money-funders, the leaseholders, who are also established as the money-spenders. The leaseholders, with the incentive of saving money and keeping their costs as low as possible, are empowered to shop around for the best deal, and, most importantly, cut out the commission-taking middle-man managing agent.
How to ensure that you avoid commission-inflated insurance premiums
In order to avoid paying such commissions, leaseholders should manage their block using Block Administration Services, rather than a traditional managing agent, with whom the problem of commissions will always remain. Alternatively, company directors should approach independent brokers specialising in selling insurance directly to residential management companies in order to ascertain how much commission is being taken - something which is well within their rights.
Additionally, it's worth noting that for blocks where a landlord controls management, the savings made on account of the elimination of insurance commission can cover the cost of a Right to Manage acquisition.
Acquiring the Right to Manage enables leaseholders to take control of the management of their block away from their landlord, so that they are free to direct management decisions themselves, including the issue of which insurer is contracted to provide cover to their block.