UK Financial Conduct Authority launches premium finance market study

The Financial Conduct Authority (FCA) has recently launched a market study into the insurance premium finance market, which follows the regulator's participation in a new UK government taskforce focused on the insurance industry.

Premium finance is defined by the FCA as "a specialist form of credit sold to insurance customers when they buy a policy that allows them to spread the annual upfront cost of the premium over time, typically in monthly instalments."

The market study will assess two important aspects of the premium finance market: whether customers are receiving fair value from premium finance providers and whether there is sufficient competition within the market.

Interested stakeholders have been invited to respond to the proposed scope of the market study by 18 November 2024.

Why now?

Premium finance is important for many consumers. The FCA has estimated that over 20 million people use premium finance to pay for their vital insurance products, such as home and car insurance, by monthly instalments. 

The FCA is concerned that the premium finance market may not represent fair value for some customers and that competition in the market may not be functioning effectively. These are not new considerations for the FCA: in 2022, it wrote to CEOs addressing the relatively high annual percentage rates (APRs) for premium finance products compared to the low credit risk of the products. It is concerned that rising premium prices may be making the situation worse, as this has meant more people (in particular, vulnerable customers) relying on premium finance.

With the FCA's Consumer Duty now in effect, the FCA has highlighted that insurance firms should look at premium finance as part of the fair-value assessments for their insurance products. At the same time, regulated premium finance firms have their own obligation (as manufacturers of the products) to ensure that their products provide fair value. In this context, the commission paid by specialist premium finance providers to intermediaries is something that the FCA is very interested to look at in its market study, as it is concerned that commission structures may create misaligned incentives and reduce competition in a way that leads to customer harm.

Since the publication of the market study,  the Court of Appeal has published its judgment in Johnson, Wrench and Hopcraft, which has a wider impact and raises questions for UK credit brokers and lenders. There is no doubt that this judgment has increased the importance of the payment of commissions and the FCA will be looking very carefully at how premium finance providers interact with their brokers in light of the judgment.

Areas of focus 

To assess whether consumers are receiving fair value from their premium finance products, the FCA's analysis will include a study of:

• The cause of increased costs in motor insurance.
• Claims costs and claims handling arrangements.
• The impact of rising insurance prices on different customer groups.
• Obstacles to effective customer decision making and the role firms’ practices may be playing.
• Incentives created by commercial arrangements between different providers in the supply chain, and whether these may be creating conflicts of interest and shaping misaligned incentives that result in higher prices for customers

The FCA is also reviewing competition within the premium finance market. To do this it will assess how the premium finance market works and the outcomes it produces for consumers, as well as what market forces influence decision-making by firms and customers. It will also look at whether there is a lack of competitive constraints in the market resulting in poor customer outcomes.

This assessment will involve the FCA gathering information on premium finance products offered by insurers, intermediaries and specialist premium finance providers. It will also gather data on other agreements that consumers use to spread their insurance cost, as well as other business activities by firms that might affect the provision of premium finance. 

Following the review, any remedial action deemed necessary by the FCA may include amendment to regulations, publication of guidance and materials to support industry self-regulation, utilisation of existing regulatory frameworks (such as the Consumer Duty) or firm specific enforcement action.

Osborne Clarke comment

The premium finance market is clearly an area of focus for the FCA. The market study shows the regulator looking at the market from two angles: under its strategic objectives of protecting consumers and ensuring the markets function well and under its competition powers.  

At this stage, the regulator is undertaking a fact-finding exercise. However, should it find consumer harm, it is plausible that the FCA might intervene either under its existing powers or through general or targeted regulatory action. The scope of the market study is broad, so the possible outcomes are currently uncertain, especially in light of the Court of Appeal's recent judgment.

The Consumer Duty has required firms to undertake significant reviews of their products to ensure good customer outcomes – and competition can also be a difficult regulatory area to navigate.