Last month the FCA published a proposed Terms of Reference (ToR) for a new market study into the provision of premium finance for motor and home insurance policies. The scope of this market study is premium finance products sold to UK consumers, in relation to motor and home insurance policies. The ToR sets out why the FCA are conducting the market study, its scope, the key issues that will be explored, the potential outcomes that could arise from the study and the next steps.
Why are the FCA launching this market study?
There are a number of reasons, but essentially, Consumer Duty has brought greater focus on good consumer outcomes. In 2023, the FCA highlighted that firms must consider premium finance as part of their fair value assessments under the Consumer Duty. Premium finance is an important product for many customers for policyholders who pay for insurance in instalments. It allows customers who are unable to afford paying for their insurance in one lump sum to get the insurance they need, by paying in instalments.
Due to the potential scope of the study and the impact on policyholders, the FCA are concerned that premium finance may not represent fair value for some customers and that competition may not be functioning effectively. For example, in 2022, the FCA wrote to CEOs expressing concern that premium finance products which have low associated credit risk but high Annual Percentage Rates (sometimes up to 30%), could potentially mean some products were falling short of expectations that non-investment insurance products (including when sold with premium finance) represent fair value for customers.
There are also different factors to consider in relation to Consumer Duty: these include premium finance charges potentially being too high, relative to the credit risk and cost of providing the service, complex commercial arrangements between parties across the supply chain, commission structures, and business practices (such as how and when information is provided to consumers). These may create poor incentives and limit customers’ ability to make effective decisions.
And to make matters more difficult, rising premium prices may be making the situation worse. In 2023 motor insurance policyholders faced a 25% average increase in premiums compared to the prior year, driven by factors such as inflation and rising claims costs. As a result, this may have increased the number of people needing premium finance to spread their insurance premium cost. The FCA is concerned that vulnerable customers, who are more likely to pay their insurance premiums in instalments, may have been impacted more severely.
With this in mind, the FCA is concerned that the premium finance market is falling short of the standards that is expected from firms.
What is the FCA hoping to achieve?
The FCA is looking to understand how competition works in the premium finance market and the outcomes it produces for consumers. The study will also consider the incentives between parties in the supplier chain and the obstacles to effective customer decision making.
Also, depending on the findings of the study, the FCA will consider whether there is a need for regulatory action that allows for a proportionate response to any harm uncovered.
