Call of duty - FCA takes on Premium Finance

The FCA has published a market study inviting discussion on premium finance. At the same time, the Government has announced a plan to assemble a new cross-government taskforce on motor insurance. This will focus on ensuring customers are being treated fairly (both by being offered affordable premiums and an appropriate level of cover) and equally (regardless of demographics, geographies and communities).

In simple terms, premium finance allows customers to spread payment of insurance premiums over time, with this typically being paid in monthly instalments. This can help spread the cost and the FCA notes that this is something customers are increasingly looking to do, given the cost of living crisis and increase in premiums, with 20 million customers using such arrangements on one or more policies. However, whilst some providers will charge the same whether payment is made upfront or via instalments, the FCA notes that some providers charge between 20 – 30% APR on the money borrowed, along with commission and fees. This has been criticised as a way to "tax the poor" – as those who can't afford to pay the premium upfront, are being asked to pay more. This is a particularly acute concern as the markets where premium finance is most commonly offered are usually the most essential areas – such as motor and home insurance. 

The FCA published its market study on 16 October 2024 as part of its ongoing work on motor and home insurance. The Consumer Duty is at the front and centre of this, with the FCA noting that it had stated as early as 2023 that firms needed to consider premium finance as part of their fair value assessments. The FCA is also aiming to understand how competition works in the market and see whether regulatory intervention is required.  

On the same date the Government announced a new taskforce to ensure the motor insurance market is treating  customers fairly.  The taskforce comprises the FCA, the Competition and Markets Authority and ministers from several departments. The goal is to identify factors behind rising premiums and to look for solutions that might keep costs under control. Additionally, the taskforce will look to assess the equality of motor insurance offerings from different demographics, geographies, and communities.

The motor insurance market has been under the spotlight in recent years due to its significance in modern life – both the taskforce announcement and the market study highlight the essential nature of such insurance. The scrutiny is likely to continue to grow, as the Consumer Duty means that firms have no option but to review their offerings periodically to make sure they are delivering a fair deal for drivers, and the FCA will take action to remedy things if it does not believe fair value is being offered. Hopefully the FCA will take a balanced view and consider fair value in light of the increasing economic pressure on providers of such insurance as well as the financial circumstances of consumers. However, given that the FCA notes that some providers are charging APR of 20 – 30% on premium finance in circumstances where other providers offer this for free, it seems to be a safe bet that the FCA will be looking to drive change in this sector and will use all the tools at its disposal in order to do so.

FCA invites all stakeholders to share their views on the Study by 5pm on Monday 18 November 2024.