Richard Adams examines the regulatory and technological changes that are making the use of premium finance an attractive way of managing and enhancing broker cash flow
One premium finance provider recently claimed that the onset of statutory regulation will make premium finance a more important profit centre for brokers because the income is excluded from working capital calculations and Financial Services Authority fees (PM, broking supplement, 27 November 2003, p26). But to what extent do other providers and users of finance agree with this? And are there other factors likely to drive more widespread use of finance facilities?
Alison Mills, sales & marketing director of Close Premium Finance, who made the comment elaborates: "Premium finance income is increasingly becoming material to brokers' bottom-line figures. And many are looking to maximise this by focusing on more efficient ways of billing clients. As broker handling of client money comes under increased scrutiny, outsourced premium finance is becoming an attractive way of improving and managing cash flow."
However, she claims that another major driver behind broker uptake is the growing availability of technology to deliver finance. "Of our business, 90% goes through our Iprompt system. Brokers are not only becoming more sophisticated in their use of technology, but also in their recognition that profit is often in the detail, which is driving an increased use of premium finance by them."
Ian Woodley, head of sales at Benfield Premium Finance, believes that incoming statutory regulation will have an effect - but only a marginal one. Referring to Ms Mills' comment, he says: "There is a certain logic to this, but I don't foresee FSA regulation having a great impact on the uptake of premium finance. However, FSA rules requiring brokers to receive the entire payment at point of sale will dampen informal practices such as brokers accepting a third of payment up front with two more cheques to clear the balance. For brokers to continue offering this kind of flexibility for clients, they will have to have more formal relationships with premium finance providers."
Giving a broker's perspective, Paul Meehan, managing director of Yorkshire-based Smart and Cook, thinks regulation will be a major boost to premium finance providers. "I think there is absolutely no doubt that regulation will cause a greater take-up of premium finance. The regulator seems to want brokers to handle client money less and there could come a time when the finance house pays the insurer directly - bypassing the broker altogether.
It is still unclear where liability lies with credit risk transfer - with the broker or with the insurer. At any rate, the FSA is going to require tighter controls on the handling of client money from the outset, which will see the increased use of premium finance."
Mr Meehan adds that brokers making the transition to using premium finance under the new regulations will also be incentivised by the added certainty regarding commission payment. "When a broker uses a finance facility, they know they will be paid within 28 days and can collect on the commission. If premium finance is not used, this can take twice as long in some cases, so these facilities provide a great deal of certainty for a broker's cash flow."
However, Simon Horswell, sales and marketing director of Aascent, does not agree that regulation will be the main trigger for brokers to embrace premium finance. "Brokers ought to be making more use of premium finance than they are and there are other factors that will drive this more than regulation." He agrees with Ms Mills that the availability of technology is a factor encouraging broker use of external client financing. "The main thrust of this is with software house integration - bringing premium finance facilities into brokers' back offices. Software houses themselves are getting more comfortable with the regulated environment that their products and services will have to be compatible with, and implementation is increasing," he observes.
Mr Woodley points to another characteristic of finance that is driving uptake. "It is the way premium finance enables a product to be sold that will see it grow. For example, products, such as cars, are often advertised as being £199 a month. Because people are paid monthly, they think monthly, and are sold to in kind. Insurance policies, once a broker has the finances in place, should be sold more on this basis, as it is one that is used as a selling point in virtually every other area of retail. I think when brokers adopt the sales technique that complements premium finance, you will see them using it more and more."
From the incoming regulator's point of view, David Russell, a manager in the FSA's policy department, says it is too early to say whether brokers will eventually be required to cease handling client money and that there are no plans yet to introduce this. He adds: "Brokers will not be obliged to use external premium finance providers under FSA regulation, as long as internal arrangements to offer this facility are segregated from the client account and are managed correctly. Broker use of external facilities will be down to their own assessment, based on commercial or economic reasons. If a broker feels the use of external premium finance provision would help them better manage their client account, this may be a consideration indirectly linked with regulation."
This canvass of opinion shows that regulation is certainly focusing broker minds on the handling of client money and perhaps, therefore, increased use of premium finance. The consensus seems to be that FSA regulation will have an indirect - but positive - impact on uptake, combined with other factors encouraging time-pressed brokers to be attracted by the potential for convenience and cash flow certainty.
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