Why premium finance is like a teenager’s stinky socks

Like a parent standing with their hands on their hips in the doorway of a teenager’s bedroom, the FCA’s head of insurance Matt Brewis couldn’t have made it any clearer at the start of this year that the watchdog was fed-up with general insurers profiteering from premium finance.

In an exclusive interview with Insurance Post’s news editor Scott McGee, he labelled premium finance a “poor product” and warned the regulator had “talked about it enough”.

Like any parent who has grown hoarse from repeated warnings, I am sure the FCA is disappointed that it has come to this.

However, last month, Which? research found several motor and home insurers were still charging “excessively high levels of interest on monthly payments” –  with APRs of up to 45% uncovered. This was akin to another parent poking their head around your front door and being unable to hide their horror at the mounting pile of dirty socks and crisp wrappers on your teenage son’s floor. Action had to be taken.

Given the FCA gave the sector the length of time it takes to conceive, grow and give birth to a baby to stop profiteering from premium finance, it is no surprise that its hands have moved off its hips and it is stomping into insurers’ rooms for a market review.

The FCA will now look into whether premium finance payment options for home and motor cover represent fair value, how well customers are made aware of their financing options, plus the role of commission.

Enough is enough

Like any parent who has grown hoarse from repeated warnings, I am sure the FCA is disappointed that it has come to this.

Back in April, when the Association of British Insurers’ members committed to new steps to try and manage the amount that those paying monthly for their motor insurance were charged for the benefit, I bet the FCA was as hopeful as a parent who heard their teenager raising from their slumber and moving around.

But the data from Which? was a painful reminder for the FCA that this mess needed to be dealt with properly, sooner rather than later, before it festered, bred mould and attracted vermin.

Eamon McGinnity, UK insurance partner at EY, notes the premium finance market study is the third major regulatory intervention from the FCA since August, and sets the regulator’s clear intention to subject the industry “to a period of heightened regulatory scrutiny”.

McGinnity says: “The spotlight will remain firmly on product pricing and distribution, fair value and vulnerability.

“With the regulator and government focused on driving real change in the market, it is vital that insurers respond to concerns by proactively sharing their vision for the delivery of fair value to all.

“If they don’t, it is now very clear that the regulator and government will shape the future for them.”

Cracking down

The FCA expects to publish an interim report and propose “next steps” for premium finance during the first half of 2025.

As compliance consultant Branko Bjelobaba observes, given the APRs uncovered by Which? this summer, a “crack down on the manifest greed of some that would even make Shylock blush” seems inevitable.

Bjelobaba says: “When motor insurance alone has gone up 45% in a year, most people will use instalments to pay – just common sense. To then be exploited is just so wrong.”

It isn’t too late to avoid being put on the FCA’s naughty step or asked to leave home.

For brokers, he says the FCA could require compulsory disclosure of earnings and the introduction of a cap based on a formula of, say, no more than two times base rate, or the average of a short-term loan at a High Street bank.

For insurers, Bjelobaba reckons they will need to articulate why they even need to charge extra – ie, do they lose investment income in not having the premium paid in a lump sum?

As he observes, if councils can let us pay our council tax in instalments at no extra charge, “why do insurers and brokers bleed us dry?”  

But, to go back to my analogy of that messy teenager’s room, I feel it isn’t too late to avoid being put on the FCA’s naughty step or asked to leave home.

As Jeremy Keating, author of Price Writer: The nine-step method to becoming a highly successful general insurance pricing leader, notes, even though the FCA’s review has now kicked off, insurers could fix this before the watchdog must wade in further.

Like a kindly grandparent stepping in to pick the worst of the debris off the floor, James Daley, managing director of consumer group Fairer Finance, points out insurers and brokers should take a step back right now and look at how to build a fairer market that provides affordable access to insurance for all.

He says the sector should consider whether premium finance is needed at all.

Daley says: “It only exists because most insurers insist that consumers pay for their annual insurance upfront, forcing them to borrow at punitive interest rates if they can’t manage it.”

If providers want to regain the regulator’s faith, then they should tidy this mess up themselves before the FCA feels it has no choice but to wade in and start throwing out the sector’s prized possessions along with their crumpled crisp packets and stinky socks.