On 22 July, the Financial Conduct Authority (FCA) published the initial findings from its comprehensive Premium Finance Market Study (PFMS). This groundbreaking initiative is set to revolutionise the provision of premium finance for motor and home insurance. The PFMS, which began in October 2024, is part of the FCA’s broader efforts to ensure that financial products and services offer fair value and thrive in a competitive market.
Background and Rationale
Premium finance offers consumers the flexibility to pay their insurance premiums in monthly instalments rather than a single annual payment. This option is a lifeline for those who may not have the financial means to pay a lump sum upfront. However, the FCA has identified potential issues with the value and competitiveness of premium finance, particularly in light of rising premium prices. This has prompted the FCA to take a closer look at the market dynamics.
Cost Implications of Premium Finance
The FCA’s initial findings reveal some critical insights into the premium finance market. One of the standout concerns is the high cost of premium finance for certain consumers. The research indicates that the annual percentage rates (APRs) on premium finance products can range between 20-30%, with nearly 20% of consumers paying over 30%. Additionally, opting for monthly payments instead of a single payment can cost consumers an extra 8% to 11% on their insurance premium. When combined with high APRs, this may not represent fair value for customers, especially those in financial difficulty. The study also highlights potential issues with commission-driven pricing and double charging, which could further disadvantage consumers.
Another significant finding is the widespread use of premium finance among consumers. The FCA’s data shows that 79% of adults in financial difficulty have used premium finance, and over 20 million people are estimated to pay for their insurance this way. In 2024, 60% of motor and 41% of home insurance customers paid by instalments because they could not afford a single payment. This widespread reliance on premium finance underscores the importance of ensuring that these products offer fair value and operate in a competitive market.
Variability in Premium Finance Models
The FCA found that there are different commercial models for providing premium finance, which can affect both the costs and access for consumers. Larger brokers and insurers often self-fund premium finance, while smaller brokers rely on specialist premium finance providers (SPFPs). The relationship between brokers and SPFPs is crucial for smaller firms to access competitive funding. Premium finance margins also vary widely, with insurers averaging 53% and SPFPs averaging 24% between 2018 and 2023. Although the FCA acknowledge that firms offering premium finance incur costs, they believe that margins materially exceed costs for some providers.
Challenges in Comparing Credit Products
Consumers often face difficulties when comparing premium finance with alternative credit products. The Insurance Conduct of Business (ICOBs) rules require that consumers understand the cost of paying monthly versus annually. However, the FCA found that comparing premium finance with other credit options can be confusing due to varying terms and rates. Additionally, some consumers may face higher underlying insurance premiums when opting for monthly payments, raising concerns about so called ‘double dipping’ – the practice of using the customer’s decision to pay monthly to increase the price of their premium without making it clear and transparent they are doing this.
Implications
The FCA’s study has revealed the significant impact of premium finance on consumers, particularly those in vulnerable situations. For many, premium finance is not just a convenience but a necessity. The high APRs and potential for double charging mean that some consumers may be paying more than they should for their insurance. This is particularly concerning for those in financial difficulty, who may be more likely to rely on premium finance to spread the cost of their insurance.
The study also highlights the need for greater transparency in the premium finance market. The FCA is concerned that consumers may not be fully aware of their financing options or the costs associated with premium finance. This lack of transparency can make it difficult for consumers to make informed decisions about their insurance and financing options.
Next Steps and Recommendations
As the market study progresses, the FCA plans to carry out further analysis to better understand the nature of competition within the premium finance market. The FCA will actively engage with firms, industry groups, and stakeholders across the premium finance market to gather their views and support its ongoing work. The final report is expected to be published towards the end of 2025.
Call to Action for Firms
Now is the time for firms to take proactive steps to align with the FCA’s recommendations and ensure their premium finance products offer fair value. By doing so, firms can not only comply with regulatory expectations but also build trust and loyalty among their customers. For example, firms may wish to:
- Benchmark Your Products: Evaluate your premium finance products against the FCA’s findings and be prepared to address any outliers. This includes a robust pricing methodology, APR rate justification, and commercial margins that demonstrate fair value to consumers.
- Commission Arrangements: Examine the effects of commission and clawback arrangements to ensure they do not create unnecessary friction or poor outcomes.
- Enhance Transparency: Provide clear and comprehensive information about premium finance options and associated costs. Ensure any premium differences between monthly and annual payments are justified.
- Engage with Stakeholders: Actively participate in the FCA’s ongoing work by sharing your views and insights with the FCA by 30 September 2025. In doing so, collaborate with industry groups and stakeholders to address common challenges and improve the overall market.
- Focus on Customer Needs: Prioritise the needs of your customers, particularly those in vulnerable situations. Offer flexible and affordable premium finance options that cater to their financial circumstances.
By taking these steps, firms can position themselves as leaders in the premium finance market and demonstrate their commitment to providing fair value and excellent service to their customers. The FCA’s Premium Finance Market Study is an opportunity for firms to innovate, improve, and build stronger relationships with their customers.
Conclusion
The FCA’s Premium Finance Market Study is a crucial step towards ensuring that premium finance products offer fair value and operate in a competitive market. As the study progresses, the FCA will continue to engage with stakeholders and carry out further analysis to address these concerns. The final report, expected later this year, will provide a comprehensive overview of the premium finance market and offer recommendations for ensuring that these products serve the best interests of consumers. So, now is the time for firms to critically challenge their current approach and take proactive steps to address any outliers.
If you would like to discuss any aspect of the FCA’s premium finance market study or any other conduct related matter, please contact us at: hello@square4.com
Darren Fisher – Senior Advisory Director (Insurance)
