Experts warn of potential broker insolvencies due to premium finance proposals

Warning sign against cloud backdrop

The British Insurance Brokers’ Association and premium finance providers have warned of a possible hit to broker solvency in the event of bad debts under the proposed guidance issued by the Financial Conduct Authority last week.

The FCA issued its proposals on Friday including payment deferrals, waiving fees and lowering interest rates. It is running a consultation that lasts until today ahead of potentially implementing the finalised guidance on 13 May.

The about turn came less than a month after the regulator had explicitly ruled the sector out of its wider guidance on temporary financial relief for consumer credit customers during the coronavirus pandemic.

At that time Biba’s head of compliance and training David Sparkes welcomed that premium finance had been excluded from the measures stating “the exposure could have run into millions of pounds and could have driven many a small broker out of business”.

Sparkes told Post that in its latest submission the trade body would telling the FCA to look at its previous submissions and make clear there is “still very much a risk”.

“I’m not saying it will definitely happen,” Sparkes stressed but reinforced he would be making sure the “FCA is mindful” in what it does.

Recourse

Under the guidance the FCA reported: “Where a customer wishes to receive a payment deferral, a firm should grant it unless the firm determines (acting reasonably) that it is obviously not in the customer’s interests to do so.”

Sparkes noted that in the event of customers never paying it was “very likely they [brokers] will be left holding the bill”. This is due to the majority of policies being recourse arrangements meaning if the lender cannot get the money back the debt becomes the broker’s.

You have to be careful that in trying to fix one thing you don’t create another problem
David Sparkes, Biba

He gave credit to premium finance houses for “talking to the brokers that use their systems to try and see a way around it”.

“I wouldn’t want to paint a false picture, they are working together,” he confirmed.

The guidance is applicable to personal lines customers and SMEs with annual turnover of less than £6.5m and fewer than 50 employees.

Over half of Biba’s membership are micro enterprises, defined as employing fewer than 10 people with less than €2m (£1.74m) of turnover.

“You have to be careful that in trying to fix one thing you don’t create another problem,” he said arguing debts should not be pushed to such small firms.

Sparkes said: “Premium finance is very different from other types of loans, you can’t use the same solutions as you might for credit cards or a mortgage.”

If brokers find another way to help clients they do not have to specifically follow the guidance’s suggestions just so long as they can show and prove what they have done is in the customer’s interest, Sparkes added.

Deferral period

Bundeep Singh Rangar, CEO of Premfina said the firm was putting together a response to the FCA as it had done in April.

By the end of April Premfina had granted 261 holiday payment requests, he revealed to Post.

“If you give them three months extension and they don’t pay we don’t have a recourse left any more.”
Bundeep Singh Rangar, Premfina

Singh Rangar assessed that the FCA was giving “room for manoeuvre” and its latest guidance still left the finance providers in the “driver’s seat” rather than being a blanket order to give deferrals.

Firms are expected to determine if a decision is in the best interest of the customer and in effect that it can request evidence to back up requests as it has done so far.

“The issue, and we highlighted that in our previous feedback, was if you extended [deferral periods] to three months and the cover finished in one or two months you are potentially stuck with a bad debt,” he said.

“It has to have at least a one month buffer.

“If you give them three months extension and they don’t pay we don’t have a recourse left any more.”

This could be a refund on the policy or from brokers it would normally just be a case of offsetting the next commission payment.

In the latest guidance the FCA said it expects the payment deferral period, which can be rolling, to be granted for a minimum of one month and up to three months.

The guidance also dealt with reducing lines of cover, waiving fees and changing interest rates.

Ravi Takhar, CEO of Bexhill UK said that coming under the auspice of the guidance would not be an issue.

“We are geared up anyway,” he confirmed adding that with Treating Customers Fairly it was already making sure that customers who needed help were given it.

“On our website we have already told people if they need deferrals because of Covid-19 they should contact us.”

Fees

From the consumer’s perspective they don’t really distinguish between premium finance or credit cards or mortgages
Ravi Takhar, Bexhill UK

Takhar added that the industry had already accepted that customers should not be charged fees in such a situation and that missed payments in this period should not affect credit ratings. The FCA detailed that ratings will be affected if payments are not made after the deferral period.

Brokers fees may become more of an issue, according to Biba.

Some may have charged a sum up front to pay for the cost of future mid term adjustments but others will have expected to use the fees to pay for the team to do the work and could end up operating at a loss in providing that service.

Rates

Lenders’ interest rates are already at a low level, the premium finance providers said.

“The rates are increased by insurance brokers and maybe they need to look at the commissions they are charging with respect to this finance on a generic basis and whether they should be charging any commission,” Takhar said.

Similarly, Rangar said looking to lower premium finance rates was “out of sync with market reality” pointing to a credit squeeze increasing the cost of credit in society.

Takhar predicted that the new guidance would not lead to a spike in requests. He backed up that people had already been making approaches where necessary despite premium finance having been previously excluded.

“From the consumer’s perspective they don’t really distinguish between premium finance or credit cards or mortgages,” he said. “It is just debt. If they were in difficulty paying they would be on the phone.”

Premium Credit told Post that it had moved to payment deferrals back in March.

“We welcome the specific clarification for premium finance from the guidance issued for other types of consumer lending recently,” chief commercial officer Jon Howells said.

“The paper broadly aligns with our thinking and we will provide feedback to the FCA through the FLA before the consultation closes.

“We’re considering the finer points to ensure we continue to provide the appropriate support for our and our partners’ customers.”

Close Brothers Premium Finance declined to comment.

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