FCA’s premium finance conundrum: act or step back?

Emma Ann Hughes

Editor’s View: With falling premiums, a stalled government motor insurance taskforce, and jittery markets, Emma Ann Hughes wonders if no action is now the most likely outcome of the Financial Conduct Authority’s premium finance market review.

When the Financial Conduct Authority’s head of insurance Matt Brewis kicked off 2024 by labelling premium finance “a tax on being poor” and warned the regulator had “talked about it enough” the impact was immediate and painful for certain insurer’s share prices.

The remarks made by Brewis, in an exclusive interview with Insurance Post’s news editor Scott McGee, resulted in the share price of both Admiral and Direct Line Group falling in one day by around 5.8% and 6.8% respectively. Ouch.

Transparency alone rarely leads to better decisions when cash strapped customers are under financial pressure

In October, the regulator finally launched a premium finance market review – on the same day the Department for Transport, then with Louise Haigh at the steering wheel, announced it had formed a motor insurance taskforce to unpick what had pushed up the price of covering cars in recent years.

The FCA stated the premium finance market review would see whether people who borrow to pay for motor and home insurance are receiving fair, competitive deals and the impact was - once again - an immediate and painful kicking in the share price.

Admiral’s share price dropped by almost 3% while Direct Line’s suffered almost a 5% drop in the 24 hours after the announcement. Enough to make anyone wince.

More than six months on from the launch of the market review, and following Consumer Intelligence’s APR Awareness month in April, it is time to consider: What’s on the FCA’s radar for solving what Brewis labelled a “poor product” that according to him sees “those who are paying monthly subsidising those who can afford to pay annually?”

Possible solutions

The FCA’s interest in premium finance stems from concerns about affordability, fairness, and transparency: customers who opt to pay for insurance monthly pay more for their cover than those who can afford a single lump sum for their annual policy.

The regulator has repeatedly hinted that the premium finance charges that policyholders pay for instalments may be excessive, particularly for financially vulnerable customers.

Potential steps the regulator could take to address the “poverty premium” that is premium finance therefore include:

  • Capping the APR on premium finance.
  • Requiring greater transparency and comparability in how instalment costs are presented.
  • As premium finance already comes under FCA regulation as firms selling it need credit broking permission, consumer credit regulations could be shaken up.

There are pros and cons for each of these regulatory interventions for both insurers and consumers, so at the moment the regulator must be carefully weighing up the potential outcome of these three actions.

A cap on APR could reduce the wide variety of  “extortionate” charges exposed by Which? and make instalments more affordable for those who need to spread costs, but this move would also squeeze insurers and brokers margins, resulting in this payment option being ditched altogether or alternative fees, which could be worse, being introduced.

Greater transparency would be a lighter-touch solution.

Making the true cost of paying monthly clearer – potentially even standardising the presentation across providers – would empower consumers without necessarily eroding insurer profitability but transparency alone rarely leads to better decisions when cash strapped customers are under financial pressure.

Shaking up regulated credit rules is the most radical option on the table.

Such a move could result in additional compliance burdens, significantly raising operational costs for insurers and brokers.

For customers, it could offer increased protections but once again, this move could also limit access to instalment options, as some providers and brokers may withdraw from offering premium finance as a payment option altogether.

Shifting sands

Ultimately, as we hurtle towards summer 2025, the FCA is facing a premium finance conundrum: should it change the regulatory requirements around this payment method or simply step back?

Since the FCA first raised concerns, motor insurance premiums have dropped from their historic highs.

This shift in price undermines the narrative that insurers are extracting excessive profits via premium finance and also complicates the FCA’s messaging - why should the watchdog intervene forcefully in a market that seems to be self-correcting?

Moreover, the government’s once-vaunted motor insurance taskforce appears to have lost momentum following the exit of Haigh, a key advocate.

Without political backing, the FCA may be less inclined to push through contentious reforms, which means a “wait and see” approach is now a realistic outcome of the regulator's premium finance review.

The FCA could argue transparency improvements already in the pipeline via Consumer Duty requirements may address many of the issues around this payment method.

The watchdog might postpone more dramatic intervention, citing falling premiums and the need to keep a close eye on ongoing market developments.

But would a “wait and see” approach dent the FCA’s credibility? Not necessarily. While some consumer groups may criticise inaction, the insurance industry would likely welcome a pause.

Given the market reaction last time the FCA spoke out—sending share prices tumbling—insurers are wary of overreach.

A measured response of no action at this stage could enhance the FCA’s standing while taking bold action could be seen as heavy-handed.

A thoughtful, data-driven pause could signal regulatory maturity – acting only when intervention is necessary and proportionate.

Ultimately, the FCA’s decision on premium finance will serve as a bellwether for how the post-Consumer Duty regulator balances intervention with restraint.

Whether it chooses to act, wait, or walk away, all eyes will be on how it justifies the outcome - and who benefits most.

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