YOUR COMPLIANCE MATTERS:         Home and Motor premium finance FCA market study 

YOUR COMPLIANCE MATTERS:         Home and Motor premium finance FCA market study 

Relevance: All firms providing Premium finance. 

Action required: Review your own Management information and position against FCA feedback. 

As part of a wider review into the private car insurance market, the FCA plans to complete a Consumer Premium finance market study. 

To quote the FCA: 

‘With recent increases in motor and home insurance premiums and the challenges brought about by the cost of living crisis, many customers are looking to find ways to spread the cost of their insurance products. 

We estimate that over 20 million adults pay their premiums in instalments on one or more insurance policy. 

Some providers charge the same total amount for a policy whether paying in monthly instalments or in a lump sum up front. However, in most cases using premium finance and paying in monthly instalments leads to higher total payments as there is a charge for offering credit, with Annual Percentage Rates (APR) being as high as 30% in some instances. 

We estimate that outstanding premium finance loan balances exceeded £5bn in 2022, generating up to £1.2bn revenues to providers. 

Given the demand for this product and how vital it is for some consumers to be able to afford their insurance, it is important that it offers fair value to those customers that use it. But there are concerns that this is not the case, and that competition may not be functioning effectively. 

Why are we doing this market study? 

The Consumer Duty has brought greater focus on good consumer outcomes. In 2023 when we laid out its strategic priorities in the insurance market, we highlighted that firms needed to consider premium finance as part of their fair value assessments under the Consumer Duty. Our concern is that the premium finance market is falling short of the standards we want to see from firms. 

We will be seeking to understand how competition works in the premium finance market and the outcomes it produces for consumers. Based on our findings, we will consider whether there is a need for regulatory action that allows for a proportionate response to any harm uncovered. 

Scope of the market study 

The scope of this market study is premium finance products, sold to UK consumers, in relation to motor and home insurance policies. We will consider whether there are any wider implications from our investigation for premium finance offered on other insurance products. 

Understanding how competition works requires that we assess the market forces that determine how firms and customers make decisions. To do this, we will gather information on premium finance products offered by insurers, intermediaries and specialist premium finance providers. 

Issues we will explore 

Our market study will assess how the market for premium finance works and will focus on the following key areas: 

• The extent to which the premium finance market is leading to poor customer outcomes 

• What factors could be driving this, specifically: 

– A lack of competitive constraints 

– Obstacles to effective customer decision making and the role firms’ practices may be playing 

– Incentives created by commercial arrangements between different providers in the supply chain, and whether these may be creating conflicts of interest and shaping misaligned incentives that result in higher prices for customers.

Potential outcomes of the market study 

Market studies can lead to a range of outcomes. Where harm is identified, there may be a range of proportionate interventions available to make the market work better. 

Next steps 

Given the urgency of the wider issues in motor insurance, we are launching this work now. We will engage with firms, industry groups and stakeholders to gather their views on the Terms of Reference and to begin discussions over what data we may need. We expect to start these discussions shortly.’ 

You can access the Terms of Reference here https://www.fca.org.uk/publication/market-studies/ms24-2-1-premium-finance-terms-reference.pdf

 The expectation is that findings will be published in Q2 2025. You should be prepared for any information requests from the regulator from the end of this year. Although the market study will focus on Home and Motor markets, any findings could inform work related to Commercial premium finance.