Managing agents that hoard millions of pounds in insurance commissions could be breaking the law.
A property silk has warned managing agents that the controversial practice, which can reap commissions of up to 40% of the insurance premium, is unlawful under basic trust law principles.
Geraint Jones QC, of Tanfield Chambers, says that barristers will have difficulty in defending agents in court because a fiduciary paying trust moneys for a product in excess of the reasonable open market price will be in breach of trust.
Under current practice, it is common for managing agents to place insurance with an insurer that pays commission. A block insured for £10m at 0.45% will reap the managing agent or an associated company £18,000 on a typical 40% commission.
“A managing agent who pays away trust money knowing or intending that it will, in part, fund commissions payable to itself or its associate is acting in breach of trust,” Jones said.
“It is, perhaps, only the fact that managing agents have pocketed this easy money for so long that might save them from a criminal conviction.”
The barrister called for a definitive court judgment on the issue. Leasehold valuation tribunals have given inconclusive decisions on whether amounts are reasonable, and the higher courts have yet to make a substantive ruling.
The Financial Services Authority intends to look at the practice next year. It will decide whether brokers and managing agents should be forced to reveal the commission they receive.
Roger Southam, managing director of managing agent Chainbow, which has campaigned for a requirement that building insurance summaries show a breakdown of payments from the premium, said that the reason tenants had not taken claims to court was owing to a lack of awareness.
He welcomed Jones’s comments and said that the practice should be given greater exposure.
“A clear requirement would eradicate the ability for the charlatans and rogues to profiteer at the consumer’s expense,” he added.
References: EGi Legal News 11/12/06
