Premium Finance arrangements 

YOUR COMPLIANCE MATTERS – Premium Finance arrangements 

 Relevance:                   All firms selling arranging premium finance

 Action required:           Review current revenue and interest rate position for client premium finance

 The FCA has published a report, which actually relates to the way in which commission arrangements for car finance are handled.

 Specifically, they have expressed concern about the fact that car dealers are often enabled to set the interest rate charged to the end consumer over and above the interest rate actually charged by the underlying finance provider.

 This has obvious parallels with the way in which many insurance premium finance providers operate. We are aware that most of our clients have an arrangement whereby the finance provider will set a rate and then leave it to the broker to determine the charge ultimately paid by their Client.

 FCA Findings

 The FCA commented that it was “concerned at the way commission arrangements are operating in motor finance may be leading to consumer harm on a potentially significant scale.”

 The FCA is now deciding how it may choose to intervene in this market in order to minimise the risk of harm to consumers. It does have the option to ban commission altogether or limit the discretion available on commission levels.

 Impact on Insurance Brokers

 Whilst the FCA has not examined insurance premium finance, it has caused premium finance providers to consider their own business models and to prepare themselves for any potential investigation by the FCA.

 In examining this issue, with our own clients, we are not aware of any circumstances in which the over-rider applied would be considered to be excessive (in the main, brokers operate on the basis of ensuring that the overall cost of obtaining finance is in line with that which would be available if the client chose to take premium finance from the insurer concerned).

 Equally, from the premium finance risk assessments that we have previously completed, it does seem clear that, where a 0% or discounted interest facility is provided by the insurer, as part of the product offering, these deals are being passed onto the client (rather than using third party premium finance automatically).

 We are also aware that there will be circumstances in which one policy, within an overall commercial portfolio, may be available with a discounted premium finance arrangement, but the client chooses to use a third party facility, offered by the broker, because they want a single finance arrangement covering the entire portfolio, the broker’s fees, etc.

 However, we have also been told that there are some brokers that are adding very substantial over-rider commissions, leading to premium finance interest charges which are massively in excess of those which would be available from an insurer. It is these firms that need to examine their practices and determine whether they could justify these in the event of an investigation by the FCA.

 Conclusion

 As mentioned, the investigation did not relate to insurance brokers, but to motor dealerships. However, the concerns raised by the FCA should not be ignored and all firms should review their current practices in order to ensure that they can demonstrate that they are treating their customers fairly.

 As always, we are very happy to discuss the issues raised by this particular investigation. Please get in touch if you would like to discuss any concerns that you may have.