FCA Premium Finance Study

The FCA have made no secret of their long-held concerns around premium finance, and the initial findings of their Market Study are the next step in the regulator’s work on motor and home insurance. Their main concerns are that some products may not represent fair value for some customers and that competition may not be functioning effectively.

An update paper sets out their summary points, alongside three separate papers with details for the UK market, profitability and how and why customers use premium finance.

The key takeaways at this point are that the FCA is not currently proposing a single market-wide cap on APRs or mandating that insurance be offered at 0% APR or a ban on commissions. The regulator is aware that these remedies would impact different business models – particularly smaller firms – which may in turn limit options for customers.

The FCA note that in 2023, premium finance was used for around 48% of motor and home policies. For some of these consumers it is a choice, but for many – especially vulnerable customers – it is a necessity because they cannot afford to pay annually in a single lump sum.

There is wide variation in the rates firms charge for paying by instalments. Typically, when firms charge extra for premium finance, the APRs are in the 20-30% range (60% of consumers), but almost 20% of consumers pay over 30%. Higher prices are more common when premium finance is distributed by brokers and funded by SPFPs.

The FCA notes that more than a third of home insurance customers pay no more for paying monthly than annually, compared with less than 3% of motor insurance customers. Costs of cancellations and changes of policy – which tend to occur more in motor policies than in home – are given as reasons for the higher cost in providing motor insurance premium finance. 0% finance options for home insurance are more common because customers tend to buy direct from the insurer and there is a higher proportion of existing relationships with the customer.

The study has found that although “premium finance providers incur a material level of costs so that consumers can pay monthly (…) revenues materially exceed costs for some providers.” Reasonable costs include operational costs (staff, IT and compliance) and funding costs (the cost of raising the money, for example) but firms should be conscious of overcharging premium finance to recoup bad debt and ensure that the actual charges are in line with the actual cost and that profit margins are similar across core insurance policies and premium finance.

Other issues include that comparing premium finance alone with alternative credit products is more difficult than comparing the total cost of different offers for the bundle of insurance and premium finance, and some monthly paying consumers may face a higher charge for the underlying premium.

As the market study progresses, the FCA plans to carry out further analysis, engaging with firms and other stakeholders with the aim of publishing the final report around the end of the year. The focus will be on higher-priced products, the value these products provide and the extent to which these prices are paid by vulnerable customers. Where they find products with prices that are not reflective of the value, they will be challenging firms.

The FCA have been clear that they will use their supervisory and enforcement tools where they discover that individual firms are falling below standards in PROD, ICOBS and the Consumer Duty. At this stage, providers should audit prices and ensure that the price of premium finance does not significantly exceed the cost to provide it, and – in line with the Consumer Duty – ensure that it provides good value.

The papers may also provide valuable information on their customer base for firms offering premium finance, as required by the Consumer Duty.

Our Compliance Consultancy website includes a range of Consumer Duty tools, designed to support your compliance.