A range of customers use premium finance, which allows for payments in instalments but often comes with high annual rates (20 – 30%). The FCA is concerned about fairness, as 79% of adults in financial difficulty have used this product. The study will examine the value of these products, customer awareness, commissions and competition barriers.
Additionally, the FCA will participate in a government taskforce aimed at stabilising or reducing motor insurance premiums. The investigation will analyse rising costs, claims handling, and how price increases affect different groups, including those from ethnic minority backgrounds, young drivers and those on lower incomes.
Why are the FCA doing the market study?
The FCA are concerned that the premium finance market may not meet expected standards and could be falling short in terms of fair value to customers. Key reasons include:
- Extensive Usage: Premium finance is critical for consumers who can’t afford to pay insurance in a lump sum with up to 52% of motor and home insurance policyholders paying in instalments.
- Concerns about high costs: In 2022, the FCA raised concerns about high Annual Percentage Rates (APR) for premium finance, sometimes as high as 30%, which may not reflect the low credit risk involved. This raises questions about providing fair value.
- Competition Issues: The FCA stresses that premium finance charges may be too high, competition may not be functioning effectively and there may be complex commercial arrangements and poor practice in place that negatively impact consumers' ability to make informed choices.
- Impact of Rising Premiums: With motor insurance premiums rising by 25% in 2023 due to inflation and increased claims, consumers (especially vulnerable ones) may be forced to use premium finance, potentially intensifying financial strain.
Scope
The focus is on premium finance products sold to UK consumers for motor and home insurance policies (regulated under the FSMA Act 2000), due to:
- Large Market Size: They are two of the largest insurance markets, with 27.6 million insurance policies and 16 million home insurance policies.
- Essential Products: Motor insurance is mandatory in the UK, whilst home insurance is often required by mortgage agreements, making consumers less able to reduce demand even with rising prices, therefore leading to increased reliance on premium financing.
- Rising Costs: There are broader concerns about the increasing costs of premiums, particularly in the motor insurance sector.
The study will consider any implications for premium finance in other insurance markets and assess how price comparison websites may influence competition and consumer outcomes.
Issues the FCA will explore
- Poor customer outcomes: The study will examine if the market is leading to Poor customer outcomes, particularly whether firms are failing to provide fair value in relation to customers paying prices that are high relative to the cost of providing premium finance.
- Lack of competitive constraints: The study will assess whether weak competition or barriers to entry in the premium finance market are limiting customer choices or driving up prices, with an emphasis on market structure and how providers set their prices and compete with others in the market.
- Obstacles for Effective Customer Decision–Making: The FCA will explore whether customers face difficulties in accessing information on premium finance options, making it hard to compare prices and shop around. Practices such as late information disclosure or complex pricing may prevent customers from making informed decisions, disproportionately affecting vulnerable customer groups.
- Incentives and Commercial Arrangements: The study will assess how commissions between intermediaries and premium finance providers might misalign incentives, leading to higher prices and reduced competition. The FCA will perform analysis on whether the arrangements harm consumers by prioritising firms' interests over customer outcomes.
Next steps
The FCA will gather information on premium finance products offered by insurers, intermediaries, and premium finance providers and evaluate how business activities like underwriting or broking impact the provision of premium finance.
Feedback is due by 18 November 2024, with the FCA expected to publish an interim report following the market study and proposed next steps during H1 2025.
If you would like any further information or would like assistance with your market study response, please contact the DWF Regulatory Consulting team.
read the full market study here
Authors: Harps Gahir and Andrew Jacobs
