Throughout our website, we refer to avoiding conflicts of interest, which is an important aspect of our service. In this blog we try and give some further information as to what conflicts of interest are in the Leasehold Management sector and the impact on Property Owners.
Managing Agents are in a position of being able to select the services to provide at a scheme and select the contractors that provides these services.
This has resulted in many Managing Agents identifying the revenue generating opportunities of providing services themselves. Typical examples are cleaning or caretaking services and Fire Risk Assessments. Additionally, many Managing Agents have identified that contractors are willing to provide kick-backs to secure work. We have been involved with multiple Managing Agents that engage in these sorts of arrangements.
The intention of this blog is not to rubbish our competitors. You’ll notice that we haven’t named any names, although we certainly could. We also accept that in a commercial world certain arrangements must exist for things to get to done. However, we believe that these arrangements exist in the Leasehold Management sector simply because they can. Managing Agents that engage in these sorts of arrangements rely on a lack of understanding and transparency. Such arrangements are not in the best interests of Property Owners.
The most common types of conflicts of interests are discussed below.
Direct labour refers to Managing Agents delivering onsite services directly through employees. These arrangements do not necessarily result in higher service charges, and if operated properly can offer benefits in terms of consistency of service and response times. However, we have yet to experience a Managing Agent that operates a direct labour force in a way that delivers demonstrable value.
An arrangement whereby an Agent instructs himself to deliver a service to a client raises an automatic presumption of a conflict of interests. An Agent should be striving to obtain best value for the client. By instructing themselves the Agent has a commercial interest in the client not obtaining best value, the more money the client pays the more money the Agent receives.
It also raises questions of contract management. If an external contractor is not delivering to the desired standard the result is often either a loss of the contract or a reduction in the contract cost. This is unlikely to happen where the it is the Agent delivering the service.
In our view a Managing Agent must be able to justify providing a contract to any party, including themselves. This involves testing the market to establish the most competitive service available. This does not happen where the Agent delivers a direct service. If you are unsure about this you should ask the Managing Agent to provide copies of the competitive quotes that were obtained when awarding the contract to themselves.
Commission arrangements exist in many forms in the Leasehold Management Industry. The most common is insurance commissions where an Agent will receive a commission from an insurance broker by placing insurance with that broker. This may be justifiable where the Agent is providing a claims handling service to both Property Owners and the broker. However, if the Agent simply refers claims to the broker, or charges an additional admin fee for dealing with an insurance claim, it is difficult to justify the commission.
Managing Agents will often have commission arrangements with regular contractors whereby the contractor pays a percentage of the cost of the work back to the Agent. The contractor will simply add this amount to actual cost of the work thereby driving up the cost of the work. Managing Agents who award contracts to themselves may also subcontract the work at a lower value, thereby receiving an indirect commission.
Commission arrangements are not specifically unlawful. However, these commission arrangements should be disclosed to customers in accordance with industry standards like the Royal Institute of Chartered Surveyors and the Financial Conduct Authority.
The existence of conflicts of interest in the Leasehold Management sector is rife unfortunately. The effect is that Property Owner’s service charges are driven up and poor services are delivered. It also undermines the trust and confidence that should exist between an Agent and client.
Needless to say, New Estate Management does not engage in these sorts of arrangements and avoid any conflict of interest that would call into question the trust and confidence between us and our customers. Often it will also result in New Estate Management being able to reduce the service charges to Property Owners.