FCA Probes Premium Finance and whether it represents fair value and good outcomes for consumers
The FCA has this week announced that it will be undertaking a Market Study into the provision of Premium Finance in the Motor and Home insurance market.
This coincides with the UK Government’s announcement of a Taskforce which seeks to deliver a fairer deal for drivers with rising insurance premiums over the last two years.
The Market Study comes amid concerns that consumers who finance their motor and home insurance policies may not be benefiting from equitable or competitive terms, as prices across the insurance sector continue to increase.
The FCA’s interest in the Premium Finance sector should not come as a surprise. This is a topic that has seen regular regulatory attention and scrutiny since 2015, when the FCA first published a Thematic Review on the provision of premium finance to retail general insurance customers (TR15/5).
Since then, we have seen premium finance impact assessments published (2017), multiple Dear CEO letters issued (2017, 2019, 2021 and 2022), and guidance issued during COVID and the cost-of-living crisis.
All of these publications raise similar concerns in respect of customer understanding, the reasonableness of the affordability assessments undertaken, the cost of premium finance and general awareness of the Consumer Credit regulatory regime at senior levels within insurance businesses.
The implementation of the Insurance Distribution Directive in 2018 compelled firms to undertake product value assessments of all add-ons, including Premium Finance. This was further reinforced through the General Insurance Pricing Practices Rules and the more recent Consumer Duty. Given the APRs charged, the FCA is concerned that premium finance may not always represent fair value for money and may be surprised that the assessments performed don’t seem to have driven any substantive change. This has led to follow on concerns that many firms have not taken the action expected of them or have done, but rather half-heartedly!
So, what is the FCA seeking to achieve from this Market Study?
In a nutshell, the FCA Market Study will focus on the following key areas:
The extent to which the premium finance market is leading to poor customer outcomes; &
What factors could be driving these poor customer outcomes, including:
A lack of competitive constraints.
Obstacles to effective customer decision making and the role firms’ practices may be playing; and
Incentives created by commercial arrangements between different providers in the supply chain and whether these could be creating conflicts of interest and misaligned incentives which result in higher prices for consumers.
These high-level topics could cover a range of areas, based on the supporting narrative within the FCA’s Terms of Reference and it will be interested to see what data is requested.
The focus on incentives is also interesting and it mirrors the focus on other products where prices or rates can be flexed during the sales process, which may potentially have a knock-on effect on the commissions derived.
The FCA recognises premium finance as a much-needed product within the market.
However, with more and more consumers utilising it because of increasing household costs and rising insurance prices, it is pertinent that industry gets this right and does so in a timely fashion to avoid future costly remediation projects.
This is a topic where we at Avyse have a wealth of experience dating back to 2015 and more recently. Over the coming days, we will spend some more time analysing the Terms of Reference and gathering the perspectives of key stakeholders across the market and we look forward to sharing some thoughts with our clients/key contacts in terms of what you can do to in readiness for the Market Study. Please let us know if you would be interested in this.
