Building Safety Bill update - February 2022

With no lull for building safety developments, we look in our February 2022 update at:

1. FCA and CMA to review residential property insurance market for flats
2. Building Safety Bill debate in the House of Lords;
3. Government Committee to consider its “polluter pays” approach; and a
4. Further DLUHC letter to residential developers

1. FCA and CMA to review residential property insurance market for flats

As foreshadowed in our second January 2022 update, covering Parliament’s debate of the draft Building Safety Bill, the Government has now taken a further step towards investigating the changes in the property insurance market for residential buildings with potential fire safety risks; and, in particular, the sometimes substantial increases in premiums that have been seen in the last few years.

Mr Gove, the Secretary of State for the DLUHC, has written to the Financial Conduct Authority (FCA) and the Competition and Markets Authority (CMA) formally requesting them to review the buildings insurance market for multiple-occupancy residential buildings. This development will no doubt be of significant interest to those involved in both the distribution and provision of residential property insurance products.

The Government’s letter:

• sets out that although a significant amount of work is taking place to identify and remediate fire safety defects, and instances of fire in multiple-occupancy blocks are decreasing, building insurance premiums for such premises have increased dramatically, and that there is a concern that the buildings’ insurance market does not effectively deliver accessibly priced or widely available insurance.
• states that the Government considers that “the market lacks transparency and there is not currently useful data to explain the rationale behind the increasing premiums…and the conditions associated with the cover. The role and remuneration of brokers, managing agents and freeholders is also unclear”.
• requests that the FCA and CMA review and report on the sector within the next 6 months, in order to understand the issues and what can be done to rectify them (with the goal of creating a more affordable marketplace for multiple-occupancy buildings’ insurance)
• asks the FCA to make practical recommendations for steps that industry, the Government and regulators can take to achieve the goal of affordable cover.

The FCA has already responded to the Government, and issued detailed open letters to relevant insurance and broker firm CEOs:

• In response to the Government, the FCA acknowledges the request and agrees that it wants to ensure that the relevant insurance products provide fair value, and that premiums accurately and fairly reflect risk. They note that they share the Government’s concern about a lack of data, and that they had recently been monitoring rising premiums in the sector and have already gathered information from some firms to help understand the cause of the increases.
• In formal letters sent to insurance and broker participants in the market, the FCA:
  • reminds participants that while they may deal with a commercial policyholder as the customer, the residential leaseholders usually are the ones who in fact pay for and have the benefit of the policies, and firms should therefore keep this fact and their interests in mind when performing their function. This is especially so as the leaseholders often have no choice of provider or policy due to lease mechanisms which mean the policy is taken out by or on behalf of the freeholder and paid for through service charges.
  • asks firms to consider what actions they can take to help leaseholders, whether individually or as an industry;
  • sets out that insurance providers must make sure their pricing models are based on a reasonable assessment of the risk posed and information on likely costs, which should be regularly reviewed;
  • reminds intermediaries and distributors that they must not take action that undermines the aim of providing fair value for products, including such as charging a commission that does not reasonably reflect the costs incurred or the benefits provided. This risk may arise where commission or remuneration is based upon a percentage of the premium, meaning that high premiums result in high commission amounts which may not in fact reflect the costs of or benefits provided by the intermediary, and could give rise to a conflict of interest. The FCA also reminds firms that their rules regarding remuneration also apply not only to that which they receive, but also that which they pay to other firms in the distribution chain, such as property managers.
  • Indicates that the FCA will be collecting information from participants to assist them in analysing firms’ approaches to pricing for multiple-occupancy buildings insurance. This will include information on commission and other distribution costs, and parties’ roles in the provision and distribution chain. The FCA also wishes to understand better the impact that fire hazard risks are having on pricing, and whether or not any price increases are justified for that reason or not.
  • Makes it clear that they will intervene further if insurers, brokers or FCA-regulated property managers are shown not to be fulfilling their regulatory obligations.

The CEO of the CMA has also responded to the Government to confirm that the request is welcomed, and that “the CMA has taken a close interest in issues affecting leaseholders, including those living in residential blocks”. The CMA also confirms that it supports the approach that the FCA has set out in response to the Government’s letter and will work with them as required.

2. House of Lords gives a robust signal of likely further changes to BSB

The Building Safety Bill (BSB) recently had its Second Reading in the House of Lords, where there was significant debate about the Bill and what its future shape may look like. We provide a summary below of some of the key points raised.

A number of comments reflected the point (previously made by opposition MPs) that the bill in its current form does not implement the significant new proposals in Michael Gove’s 10 January 2022 Statement. As we have previously reported, the Government’s intention, however, is to try to bring at least some of these changes forward as part of the House of Lords process.

In this context, one of the Conservative peers, Lord Blencathra, set out some forceful commentary as to how, in his view, this might be achieved:

“What did the Secretary of State say on 10 January? He set out the range of actions and initiatives he wanted to take. These were in two broad categories, which could be classed as leaseholder protection measures and “polluter pays” measures…[He said] he would review government schemes and programmes to ensure there were commercial consequences for any company responsible for this crisis and refusing to help fix it…… He would set a higher expectation that developers must fix their own buildings, and possibly issue instructions to insurance companies….I am absolutely certain that, if my right honourable friend Michael Gove had been in post one year ago, most of those provisions would be in the Bill today, but now we have the chance to add them”.

Lord Blencathra said that once the draft BSB reaches the Committee phase, he did not simply intend to propose just a few new clauses, but two whole new Parts, which he has asked the Public Bill Office to draft. The first Part is to relate to leaseholder protection, and would include protection from having to pay the cost of any fire-related remedial work, and also protect against betterment, and freeholders etc “gold-plating” remedial works. He has also indicated that he would like clauses “setting out alternatives to cladding replacement for low-risk buildings”; and creating a scheme similar to the Flood Re agreement between Government and Insurers (which keeps down the cost of flood insurance) for fire insurance.

The other new Part proposed by Lord Blencathra relates to the “polluter pays” scheme for fire-safety remedial works. He noted that:

“in it, I want to have clauses setting out that developers will be primarily responsible for the costs of all remedial works. Where they have created special purpose vehicles which they have now wound up, then the holding company will be liable. All contractors who supplied materials which were not fit for purpose, whether or not approved at the time, will be liable. Where we cannot find the developer or their special purpose vehicle, or their holding company, or their contractor, or their supplier, then the whole industry should be liable and pay through a levy system…”

Now, clearly, my proposals—if I lay them before the House—will impact on current company law, laws of limitation, the Building Act and a host of other Acts. There may be ECHR concerns and concerns about retrospectivity. But we have never had a problem such as this before, where companies have made billions from flawed construction in the past. I submit that it is therefore right that we reach back in time to make them pay to remedy it now…”

He recognised that it would be difficult to achieve such drafting changes in a short time frame, but that in his view this could be dealt with by allowing for the Government to have wide powers to draft further regulations at a later date to cover the detail; and that what he wants to do at this stage is to “set the parameters of the action we need to take…. so that all developers and contractors see this sword of Damocles hanging over their heads, because that is the only way they will ever pay up”.

Lord Blencathra’s comments were echoed by the Government peer responsible for the bill, Lord Greenhalgh, who noted “from… Lord Blencathra I have learned about a framework—a toolkit in my language—for protecting leaseholders and getting the polluter to pay. The Government will bring forward amendments…[many of which] we will be ready to debate…at the next stage… and that “we want every tool in the toolbox to make sure that we protect leaseholders and make the polluter pay”.

The above statements clearly reflect some strong sentiments, and make it clear that the “polluter pays” approach now seems to be the way forward.

However, the exact format that such proposals are going to take, and the detail of them, is still very much an unknown. So far, only a broad proposed amendment has been tabled last night, outlining various suggested “objectives” in the implementation of the Act when it is in force, including:

• The “accountability objective”: mechanisms should be in operation which enable persons in England and Wales who have manufactured products which have endangered the safety of high-rise buildings, and persons in the United Kingdom who have developed dangerous high-rise buildings, to be held accountable for those actions”

• The “developer responsibility objective”: where persons in England and Wales have developed dangerous high-rise buildings, they should be responsible, in financial and practical terms, for the mitigations or remediations required to make those buildings safe”

• The “building industry responsibility objective”: persons in England and Wales who have manufactured products which have endangered the safety of high-rise buildings and persons in England and Wales who have developed dangerous high-rise buildings, should, as far as possible, meet the costs arising from that endangerment and from making those high-rise buildings safe”

This draft is broad, and it is unclear at this stage, for example, what “developed” is intended to mean and whether it might cover not only the developer (e.g. the original company which commissioned the building) but also those who designed and constructed it. The position relating to refurbishments is also unclear.

Otherwise, during the debate, a number of other peers also commented on several other issues about which they wanted clarification from the Government, including:

• protecting leaseholders in buildings of any height from having to pay any remedial costs; ensuring that all fire safety defect works were captured by any scheme, including those which leaseholders had already paid for;

• the complexity of the Bill and whether it could be clarified and refined so there is a more workable and understandable structure;

• noting that the Government had undertaken a survey of buildings between 11-18m to ascertain the impact of the new PAS9980 fire risk assessment guidance, and asking if the findings of that survey will be published; as well as asking how the Government intends to monitor the approach to proportionality set out in that guidance;

• supporting the view of the Local Government Authority that there should not be a “two-tier” system of building control (as is still presently proposed by the Bill);

• commenting on potential changes to the procurement and contracting process, such as banning or further regulating the practice of retentions, so as to avoid cash flow problems impacting upon the quality of services performed or products used; and

• suggesting that the building regulations should be revised so as not to only cover “life safety” issues, as they do now, but also to provide for an element of property protection.

Given these comments, we may see other proposed amendments put forward touching on these topics.

Overall, we will have to wait for further proposed amendments to be published to know more. These are likely to be issued on a piecemeal basis over the next short while, as the next “Committee” stage is due to start on 21 February 2022; and we will provide a further update once that process is underway. In the meantime however, the comments in the House of Lords, and the suggested amendments proposed so far, make it clear that the focus remains on the two key “leaseholder protection” and “polluter pays” approaches favoured by the Government.

3. Government consults on “polluter pays” approach and issues draft “binding commitment” to developers for remediation works costs

The Government has set up a Committee to consider its “polluter pays” approach. It has also written again to developers outlining its proposals for a binding “commitment” which they are asking developers to enter into with the Government to resolve funding and remediation issues. The Committee has recently been set up to hear oral evidence and receive written submissions in relation to “the effectiveness and impact of the Government’s planned measures to make developers and industry cover the costs of remediation; to scrutinise whether the…approach goes far enough to finally fix [the] crisis, and to examine what the funding arrangement to be agreed with industry should look like”.

Written submissions are due by 16 February 2022. Any interested person can make a written submission, and more detail, including the criteria and procedure for doing so, can be found here. No written submissions have been published so far.

Various industry participants have already given oral evidence to the new Committee, including the Home Builders’ Federation; Ballymore; the Construction Products Association, and the ABI. Full transcripts of their evidence are available, and we set out some of the more interesting comment below.

HBF, Ballymore and the CPA

These entities, which are involved in the residential development and construction products industry, are already a specific target for the Government’s proposals. The Committee asked them if there were any other sections of the wider building industry that should be making a contribution, and, not unsurprisingly, all were in agreement that the pool should be wider. The CPA stated that “there needs to be a conversation with the whole supply chain. Clearly buildings are constructed by a wide range of installers, contractors and sub-contractors…” , and the HBF referred to the fact that, in particular, renovation or refurbishment projects are generally not performed by the developer/house-builder entities that the Government has focused upon so far.

The point was also made that there was a continuing lack of data regarding key issues, such as which buildings might actually need remediation and why, or even who built them. HBF and the CPA emphasised that such information needs to be clarified so it can feed into the conversation about how big the problem really is and how much it might therefore cost. The HBF confirmed that it was working with the Government to try to establish the relevant information.

It was also noted that there may be some impact on these numbers due to the withdrawal of the Government’s January 2020 advice note. In terms of its properties where remedial works may be required, Ballymore indicated that “the withdrawal of the advice notes is of quite fundamental significance….. the reality is that it could…accelerate completion of the works. For example….the scope of works on some…buildings will materially change on the back of withdrawal….we are doing a lot of work at the moment to review [this]…”.

Finally, when asked about their thoughts on the proposed 30-year retrospective extension of the limitation period for claims under s1 Defective Premises Act 1972, HBF and Ballymore noted that there was concern that this was a huge long-term liability; and that there are elements of buildings that will not even have a design life of 30 years, for instance. The overall view was that more thinking was needed about how it might be implemented, and the impact.

ABI

The ABI was asked about the suggestion (which we reported on in our second January update) that insurers should be made to contribute directly to remediation costs, such as by way of a levy. The ABI pushed back on that concept, noting that “insurers have not built any of these buildings. Insurers rely on a regulatory framework that works and is fit for purpose. What is demonstrably clear….is that the entirety of the regulatory system failed…..We may come on to the increased cost of buildings insurance, and we may come on to professional indemnity insurance…we need to be part of the solution but I do not think that part of the solution is for [insurers] to contribute to [a levy]”.

The ABI also commented on the current issues recently raised around the increase in buildings insurance premiums and the review by the FCA and CMA, noting that the industry was committed to working with the regulators to find a solution if possible.

4. Further DLUHC letter to residential developers

On 3 February 2022 the Government wrote again to the residential development industry, to outline progress after the roundtable discussions held with CEOs, and to set out its proposals for a legally binding “commitment” between the Government and developers regarding buildings with fire safety defects.

In summary, the Government’s proposal is that (i) developers must commit to remediating (or funding remediation of) relevant buildings 11m+ which they played a role in developing or refurbishing; and (ii) they must contribute towards a fund to cover remediation costs of all other relevant 11-18m buildings.

The letter attaches a “Key Features” document which sets out how these two principles would be intended to be formalised into a binding arrangement. It also requests feedback form developers on the proposals, particularly in relation to how to apportion contributions to the fund between participants, the structure of the fund, and how best to ensure a proportionate approach to remedial works. The letter also notes that the Government is continuing to engage with the construction products industry.

In the “Key Features” document, “Developer” is defined as “each legal entity which (i) generates or expects to generate profit from the development of residential land in excess of [£10] million per annum or on average per annum over a time period to be specified…and (ii) elects to join the scheme…”.

Given this, it appears that, at least at this stage, the Government’s focus here remains on the residential development industry, rather than those further down the supply chain such as designers or contractors. However, we do note the comments made to the Government Committee about widening the scope of the arrangements that we have set out above, so it may be that this point is not yet entirely settled.

The letter ends with a strong comment that those developers who agree to the commitments will “continue to enjoy the benefits of the Government’s services and support on financing, procurement, planning, building control, housing investment and industry development and leadership. Those who are unwilling to meet the criteria will not, and the Secretary of State has made it clear he is willing to explore taking further steps to ensure the only participants in this market are those who have committed to resolving this crisis”.

This further approach from the Government has already been met with a robust response from the residential development industry, with the Home Builders’ Federation commenting publicly that it amounted to an “open-ended and variable annual tax on UK home builders at a rate decided by a government department each year, under threat of being unable to operate in the UK” and that it was not a proportionate or fair approach. The HBF also noted that the proposal does not appear to target foreign companies or those which were investment vehicles and which developed many of the buildings that may require remediation.

It seems clear that the ongoing debates between the Government and industry are far from over, and we predict that the period in the lead up to Easter will be a crucial time as these discussions continue, and the Building Safety Bill is further amended as it makes its way through the House of Lords.