Watchdog to probe premium finance amid concerns of rising costs

The Financial Conduct Authority (FCA) is undertaking a comprehensive market study into the insurance sector, focusing on the fairness of premium finance products used for motor insurance.

The move comes alongside the launch of a new government motor insurance taskforce, aimed at addressing increasing insurance costs.

Premium finance allows policyholders to pay their insurance in instalments, but with annual borrowing rates typically ranging between 20-30%, the watchdog is concerned over whether customers are getting fair value.

The FCA estimates that over 20 million people use premium finance to spread the cost of motor and home insurance, with 79% of adults in financial difficulty relying on this method.

Graeme Reynolds, director of competition at the FCA, said: "People rely on premium finance to spread their insurance costs by paying in smaller monthly payments. We want to ensure that competition works well and make it easier for consumers to find the best deals."

The FCA’s market study will examine several areas, including whether premium finance products offer fair value, customer awareness of financing options, the impact of commission on pricing, and potential barriers to competition in the market.

In parallel with the FCA’s review, the government has set up a motor insurance taskforce, which includes the FCA as a key participant.

This taskforce will explore ways to stabilise or reduce motor insurance premiums while maintaining adequate coverage. The FCA’s analysis will focus on identifying the root causes of rising costs, particularly claims handling processes and factors affecting different types of claims.

The regulator will also assess how rising premiums are affecting various groups, such as younger and older drivers, people from ethnic minority backgrounds, and those with lower incomes.

The FCA plans to publish an interim report on its premium finance market study by the first half of 2025, outlining next steps.

The financial watchdog has previously taken steps to address concerns around premium finance. In April 2024, it issued new guidance for firms to better support borrowers in financial difficulty, including those using premium finance to pay for insurance.

This builds on earlier warnings to the insurance industry about high annual percentage rates (APRs) on premium finance products despite relatively low credit risks.

Hannah Gurga, ABI Director General, said: "We understand how crucial it can be for consumers to have the option to pay monthly, so they can manage their insurance costs. That’s why we launched our Premium Finance Principles earlier this year, which outline that any charges should be fair, transparent and reflective of the cost to the insurer. We will continue to work with our members on this matter and look forward to learning more from the FCA."