Propertymark is warning of significant challenges for the sector after the Government confirmed it will be pressing ahead with its plans to ban hidden commission payments on buildings insurance, despite mixed support from leaseholders.

The push for reform stems from Financial Conduct Authority reports that showed broker commissions on building insurance had risen by 40% between 2019 and 2022 and complaints from leaseholders that the system was ‘opaque and unfair.’

The consultation, which began last year, attracted 838 responses, with the majority (84%) from leaseholders. 47% of leaseholders supported the new approach, but 51% opposed it, and, amongst freeholders, just 24% backed the proposals, with 57% against.

No clear consensus

Despite the lack of a clear consensus, the practice of freeholders and agents taking broker commissions for arranging insurance will now be phased out.

In response, Propertymark has outlined four key concerns. It warns that removing commission altogether risks higher costs for leaseholders, particularly if agents end up adding charges elsewhere to compensate for lost revenue.

It also argues that fees should remain flexible and proportionate, reflecting the varied work required across different estates and portfolios. Nor, it says, has the Government addressed the VAT vs Insurance Premium Tax issue, with permitted fees subject to 20% VAT rather than the current 12% IPT, which could push up prices.

Tribunal disputes

In addition, Propertymark expects increased tribunal disputes, with more leaseholders likely to challenge the new charging structure.

It concludes that these reforms are a significant shift, and estate agents will need to adapt contracts, accounting and billing to replace commission with a fee-based model, and Leaseholders will expect detailed breakdowns of what they are being charged for.

The changes will require secondary legislation under the Leasehold and Freehold Reform Act 2024 before becoming law, but the Government has not yet set a timeline for implementation.